Question:
In what way do developed countries steal trillions of dollars from developing countries?

According to the Guardian, rich Western countries 'steal' large amounts of money from poor countries, much more than they give in development aid.

If we add theft through trade in services to the mix, it brings total net resource outflows to about $3tn per year. That’s 24 times more than the aid budget. In other words, for every $1 of aid that developing countries receive, they lose $24 in net outflows. These outflows strip developing countries of an important source of revenue and finance for development. The GFI report finds that increasingly large net outflows have caused economic growth rates in developing countries to decline, and are directly responsible for falling living standards.

I would like to know in what way the money is ‘stolen’, if this is illegal and if this is indeed ‘directly responsible for falling living standards’.

Explanation: The way the money is stolen refers to same-invoice faking in multinational companies, which is actually tax avoidance. Then the question becomes how the tax avoidance is related to falling living standards in developing countries.

$\begingroup$

**On Theft**

The same article you link to says that what it calls 'theft' is the practice
of multinationals dodging taxes. The article explains it the two paragraphs
before:

> Multinational companies also steal money from developing countries through
> “same-invoice faking”, shifting profits illegally between their own
> subsidiaries by mutually faking trade invoice prices on both sides. For
> example, a subsidiary in Nigeria might dodge local taxes by shifting money
> to a related subsidiary in the British Virgin Islands, where the tax rate is
> effectively zero and where stolen funds can’t be traced.

Tax dodging is not theft according to dictionary definition but I believe the
author is using the word theft metaphorically here (e.g. like when Nozick when
he said 'taxation is theft' or when Proudhon said 'property is theft', of
course its not meant literally).

**On Impact of Tax Dodging on Economic Development**

This is topic that is not yet well understood as some other areas of economics
due to lack of data. However, what research there is suggest that tax
avoidance negatively impacts economic development (e.g. see reviews of
literature such as: [ Fuest & Riedel, 2009
](https://rybn.org/thegreatoffshore/THE%20GREAT%20OFFSHORE/7.RESOURCES/ACADEMIC%20PAPERS/TAX%20EVASION/Tax%20evasion,%20tax%20avoidance%20and%20tax%20expenditures%20in%20developing%20countries%20-%20A%20review%20of%20the%20literature.pdf)
; [ Cobham, 2005
](https://rybn.org/thegreatoffshore/THE%20GREAT%20OFFSHORE/7.RESOURCES/ACADEMIC%20PAPERS/TAX%20EVASION/Tax%20evasion,%20tax%20avoidance%20and%20tax%20expenditures%20in%20developing%20countries%20-%20A%20review%20of%20the%20literature.pdf)
).

The reason why tax avoidance harms economic development is that it reduces the
government revenue that could be in principle used for provision of public
goods. Public goods such as for example, provision of effective police that
protects people and their property, or effective courts etc. In turn these
public goods and institutions they protect are crucial to economic development
(e.g. see [ Acemoglu and Robinson 2012
](https://scholar.harvard.edu/jrobinson/publications/why-nations-fail-origins-
power-prosperity-and-poverty) ). However, what is less clear is whether some
developing countries would actually in a contrafactual world where they get
this extra tax revenue spent it on such public goods or used it to prop up
corrupt regime (e.g. how oil revenue is often used by dictatorships to stay in
power).

However, the caveat above being said, its not unreasonable to state that such
tax dodging probably negatively affects economic development. Even if the
evidence is not completely conclusive its thought that it is more likely than
not to have negative effect.


Question:
Which of these two lotteries, a consumer with Von-Neumann Morgenstern preferences will choose under exponential distribution?

Consider two lotteries each having an exponential distribution. The function of cumulative distribution of an exponential distribution is:

𝐹(𝑥;𝜆)=1−𝑒−𝜆𝑥∀𝑥∈ℝ+.

The expected gain given by this distribution is 𝐸[𝑋]=1𝜆
.

Suppose that the first lottery, 𝐹1
 has a parameter 𝜆1
 and the second, 𝐹2
 has a parameter 𝜆2
. Suppose that 𝜆1<𝜆2
. Which of these two lotteries, a consumer with Von-Neumann Morgenstern preferences will choose?

I am confused on this question.

Explanation: The expected value is different from the expected utility; the decision-maker need not be risk-neutral. Probably, the assumption is that the decision-maker prefers more to less money. Then, you can solve this using first-order stochastic dominance. Just compare the CDFs pointwise. We need to look up stochastic dominance.

$\begingroup$

As already mentioned in the comments, the question appears to be framed in a
way that you should look up [ **stochastic dominance**
](https://en.wikipedia.org/wiki/Stochastic_dominance) , and contemplate about
its relation to expected utility theory, that can lead you to an answer.

Two aspects of the question worth pointing out:

  1. The payoffs per lottery are the whole  $\mathbb R$  , this is the meaning of "the lottery has a [XXXX continuous] distribution".

  2. The question does not specify a utility function, only that the consumer has Von-Neumann Morgenstern preferences. So apparently, the correct answer does not depend on, say, specific preferences about risk, but it should be more general.


Question:
Can GDP ever be negative?

Imagine that in an economy we only produced a toy and that cost us 10 dollars. We don’t sell this toy in year 1. Then this goes under Investment as +10 and GDP is +10. But say the only thing we do in year 2 is sell this toy for a loss at 8 dollars. Then investment is now -10 but consumption is +8 so GDP in year 2 is -2.

Is this a valid example of negative GDP?

Explanation: This is essentially a pathological example of the inventory change

$\begingroup$

Yes, theoretically, GDP could be negative, and you have described a
pathological case where that happens. Gross value added in your example over
the two periods is still positive, but the particular distribution of net
value added over the two periods makes GDP in the second period negative.

You could think about this as a two-stage production process. In the first
step, taking place in period 1, there is net value added of $10 in production
of toys not yet delivered to retailers. Thus, GDP in period 1 is 10 dollars.
In period 2, the retailers can only sell these goods for 8 dollars, so their
net value added is -2 dollars. If this is the only economic activity, GDP in
period 2 would be -2 dollars.

Sidenote: You have essentially described a pathological example of the
inventory change example outlined in the BEA's NIPA handbook, Chapter 7 ( [
https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-07.pdf
](https://www.bea.gov/resources/methodologies/nipa-
handbook/pdf/chapter-07.pdf) )


Question:
Have governments ever defaulted on its public domestic debt or treasury bonds?

Recently, some countries have experienced hyperinflation such as Lebanon, Zimbabwe, and Venezuela.

Has there ever been a time when a government defaulted on its treasure bond payments due to a country's economic state, such as hyperinflation, or for some national or international political issue? By default, I mean failing to pay local and international treasury bondholders.

When Lebanon prevented Lebanese citizens from withdrawing their money from banks, did it also stop paying its government bonds?

Explanation: To understand whether governments have ever defaulted, we can check examples of countries that defaulted.

$\begingroup$

> Has there ever been a time when a government defaulted on its due to a
> country's economic state, such as hyperinflation, or for some national or
> international political issue?

Yes, since default leads to increased cost of borrowing and often also to
capital flight, and host of other economic issues, countries do not default on
their debt just for fun but only when they are in economic difficulties.
Hyperinflation, is often a way how countries try to avoid default but when
country decides that cost of hyperinflation is worse than cost of default it
might decide to default.

Here are some examples of countries defaulting from [ Reinhart and Rogoff 2011
](https://www.researchgate.net/publication/5188928_The_Forgotten_History_of_Domestic_Debt)
:

[ ![enter image description here](https://i.sstatic.net/jQS5y.jpg)
](https://i.sstatic.net/jQS5y.jpg)

> When Lebanon prevented Lebanese citizens from withdrawing their money from
> banks, did it also stop paying its government bonds?

[ Lebanon did default
](https://www.fitchratings.com/research/sovereigns/lebanon-22-09-2023#:%7E:text=Eurobond%20Default%20Continues%3A%20Lebanon%20remains,of%20Eurobonds%20pending%20a%20restructuring.)
on their Eurobond on 9 March 2020. Lebanon started with [ capital controls on
2019 ](https://www.state.gov/reports/2020-investment-climate-
statements/lebanon/#:%7E:text=Since%20October%202019%2C%20Lebanon%27s%20financial,banks%20are%20denominated%20in%20dollars.)
so it did not happened at the same time, however, capital controls are typical
instrument governments close to default implement to prevent capital flight.


Question:
How to understand wages in poor countries?

Often when a news story is reporting on economic conditions in poor countries, they'll talk about people earning meager wages like $10/day or even only $10/month (I think I heard that in a story about the immigration crisis a few days ago, referring to conditions in the South American country people were coming from). To an American like me, this sounds ridiculous, that's less than the price I pay for a sandwich at lunch. Homeless beggars almost certainly make more than this. It's two orders of magnitude less than the US poverty line (a bit more than $1k/month).

But surely living expenses must be significantly lower in these countries, or these people couldn't even survive long enough to be interviewed. Does it really make sense to compare earnings between such different countries?

Explanation: in different countries prices are different so 1 dollar does not have the same purchasing power. However, they are ways to adjust for this. The most common way is to use Purchasing Power Parity (PPP) conversion rates. We can check statistics of wages after conversion.

$\begingroup$

> Does it really make sense to compare earnings between such different
> countries?

No it doesn't as you mentioned, in different countries prices are different so
1 dollar does not have the same purchasing power in US than in let's say
Maldives.

However, they are ways to adjust for this. The most common way is to use
Purchasing Power Parity (PPP) conversion rates (e.g. see [ OECD data
](https://data.oecd.org/conversion/purchasing-power-parities-ppp.htm) ). If
the article you read used this adjustment rate then you can compare the
salaries to US. There are still some caveats, these conversion rates are based
on averages, clearly a cup of coffee will be more expensive in NY or San
Francisco than in some midwestern flyover town. Same holds for developing
countries. Nonetheless, as long as you keep this in mind PPP conversion allows
you to look at differences controlling for this issue.

> Are they reporting earnings like this just to garner sympathy, by making the
> wages seem like practically nothing?

There is no need to assume bad faith. Most people are mathematically,
statistically and economically illiterate. Typical journalist does not have
degree in statistics or economics. Moreover, most journalist degrees do not
require any statistics education, and generally it is widely acknowledged that
most journalist fail miserably when reporting on some statistical results
(e.g. see [ Nguyen & Lugo-Ocando, 2016
](https://eprints.whiterose.ac.uk/89527/3/P1%20-%20Introduction.pdf) ). More
generally, you just can't make inference from some raw data, whoever presents
it.

If you see such reporting from an economic journalist, without justifying it
or using something like PPP conversion rates you could assume bad faith, but
typically it will be just likely due to lack of statistical and economic
education not some ulterior motive.

> Or are they really earning practically nothing, and just barely scraping by
> somehow?

Even when you account for PPP there are still places where people are just
barely scraping by somehow. Although, most of the absolute poverty around the
world was eradicated in the last 100 years, there is still considerable number
of people who are living in extreme poverty (e.g. see the map in [ the Our
World in Data ](https://ourworldindata.org/explorers/poverty-
explorer?time=2019&facet=none&country=NGA%7EMOZ%7EBOL%7EKEN%7EBGD%7EBOL%7EGEO%7EZMB&Indicator=Share%20in%20poverty&Poverty%20line=%242.15%20per%20day%3A%20International%20Poverty%20Line&Household%20survey%20data%20type=Show%20data%20from%20both%20income%20and%20consumption%20surveys&Show%20breaks%20between%20less%20comparable%20surveys=false)
).

Hence depending on the country you are reading about there might still be
large number of people in extreme poverty. However, two things can be true at
the same time, that there is an extreme poverty in some countries, and that
news might misreport on such poverty due to lack of statistical literacy.


Question:
Could Gaza have been "one of the wealthiest states on the Mediterranean"?

According to this transcript, (I don't have access to the original interview), Robert Kennedy told Krystal Ball:

The international aid agencies have given Hamas, have given Gaza more than 10 times per capita what we gave to rebuild all of Europe after the Marshall Plan. 8,300 dollars per capita, every person in Gaza. We rebuilt Europe with $621 per capita in Europe, and we rebuilt it. What did they do with that money? Instead of using it to make this, you know, Gaza this beautiful country with white sand beaches. It should be a paradise...They take virtually all the money and they steal it...It’s not Israel’s fault that Gaza is poverty-stricken. Gaza should be one of the wealthiest states on the Mediterranean.

If Gaza truly received US$8,300 per capita in international aid over time, would that indeed have made it - barring diversion of funds for non-rebuilding purposes - one of the wealthiest states on the Mediterranean? (I realize Gaza does not have independent statehood, and I'm assuming Kennedy's intent was that if it were a state it would be from the wealthiest.)

Explanation: The aid itself would not make Gaza the richest Mediterranean nation. To be clear, Gaza could be the richest Mediterranean nation in principle, if pro-growth economic policies were pursued over last half of a century or so, but this is impossible to achieve through economic aid. We can check how foreign aid affects other countries.

$\begingroup$

The aid itself would not make Gaza the richest Mediterranean nation. To be
clear, Gaza could be the richest Mediterranean nation in principle, if pro-
growth economic policies were pursued over last half of a century or so, but
this is impossible to achieve through economic aid.

  1. The literature that looks at case studies of economic development aid shows mixed results, in some cases showing that development aid can actually hurt economic growth (e.g. see [ Moolio & Kong, 2016 ](https://doi.org/10.30958/ajbe.2.4.6) ; [ Sothan, 2018 ](https://doi.org/10.1080/09638199.2017.1349167) ; [ Tang & Bundhoo, 2017 ](https://doi.org/10.1080/09638199.2017.1349167) ).

  2. Cross country studies show that the effect of development aid on economic growth is ([Abate 2021; [ Ekanayake et al 2010 ](https://scholar.google.nl/scholar?q=effect%20of%20aid%20on%20economic%20growth&hl=en&as_sdt=0&as_vis=1&oi=scholart#d=gs_cit&t=1703690270132&u=%2Fscholar%3Fq%3Dinfo%3AgdJuUlzIinUJ%3Ascholar.google.com%2F%26output%3Dcite%26scirp%3D0%26hl%3Den) )] [ 4 ](https://www.tandfonline.com/doi/full/10.1080/23322039.2022.2062092#:%7E:text=Large%20number%20of%20studies%20found,countries%20than%20middle%2Dincome%20countries.) :

  * Dependent on institutional quality (e.g. how well are property rights protected, contracts enforced, etc).
  * Non-linear, extremely poor countries benefit more than less poor countries. This implies that country can't really become rich just thanks to development aid alone.

Hence, if you want to interpret the quote literally then its clearly not
rooted in sound economics. Aid can at best help with economic growth when the
country is very poor but as a country approaches middle and high income levels
the benefits to economic growth would become very small. Moreover, these
benefits are contingent on having good institutions.

However, if you want to interpret the quote more loosely as, Gaza having
potential to become the richest Mediterranean country, if sound policies, like
not diverting development aid, were pursued, then there is truth to it. It is
generally consensus in economics that country does not need any natural
resources or have large size to grow. Countries like Singapore are prime
examples of that.


Question:
Why do governments issue bonds rather than just increasing tax or printing money?

Assuming a government needs to raise money, what are the pros and cons of increasing taxes or printing more money or selling bonds?

Explanation: One disadvantage of money growth is inflation.

$\begingroup$

In order to answer this question, first let me quickly provide some relevant
context:

  1. Most modern governments cannot print money directly. They can do it indirectly, most central banks (which are government institutions) can buy government bonds with newly created reserves. Some central banks such as ECB have even power to actually print money. This is analogous to financing government with printing new money. However, in developed countries central banks are nominally independent (like courts or police force) from central government. Hence this option is, in most countries, only available if technocrats at the central bank are willing to play ball with government.

  2. Even in cases where executive power in the government does control money supply or central bank is willing to play ball, monetizing government finances results in larger inflation. There are numerous empirical studies that show there is (sometimes endogenous) causal effect of money supply on inflation (e.g see [ Grauwe & Polan (2005) ](https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9442.2005.00406.x?casa_token=eB3vl6f0WOMAAAAA:6uR2-Wov04WFV2K6ZBLO--Az7Z5KWLLPgiXfLMy-IrL3xrvZShOwiDC-gU_I4_me4ak5vI39UFEspwZA) or [ Frain (2004) ](https://www.esr.ie/ESR_papers/vol35_3/Vol%2035_3Frain.pdf) ). So there is a trade-off here between monetizing spending and inflation.

  3. Issuing more bonds is costly since the bonds have to be repaid with interest (unless sold to central bank where point 2 applies).

Hence there is no free lunch. Government intertemporal budget constraint is
given byL

$$G = T + \theta - B$$

Where  $G$  is government spending,  $T$  tax net of interest payment,
$\theta$  high powered money (i.e. monetizing gov finances) and  $B$
government borrowing.

Now to circle back to your question:

> what are the pros and cons of increasing taxes or printing more money or
> selling bonds?

The pros of using  $B$  or  $\theta$  is that government does not have to
raise taxes now (which is unpopular), depresses _current_ economic activity
and leads to deadweight loss to economy which is just pure waste for society.
The con of  $B$  is that government will have to raise even more taxes in the
future (to cover for spending and interest). Finally the con of  $\theta$  is
higher inflation.


Question:
Transitivity of Preferences paper

I am going through some of my old grad school notes, and in my microeconomics notes on transitive preferences, the teacher made a note of a behavioral economics result where when presented with two dates, A and B, a person might say they would strictly prefer A to B. Then when presented with A, B, and B', where B' was slightly uglier than B, then suddenly the preferences might turn into B preferred to A preferred to B'.

Does anyone know what paper this could be taken from? My notes here were written in September 2015, so the paper would have to have been earlier than this.

Explanation: The central question is to understand the behavior, which is related to decoy effect whereby people will tend to have a specific change in preference between two options when also presented with a third option that is absolutely worse.

$\begingroup$

I do not know the paper you are referring to but the behavioural bias is
called the **attraction effect** or decoy effect ( [ wiki
](https://en.wikipedia.org/wiki/Decoy_effect) ). It is well known in
behavioural economics and psychology, so it should be easy to find sources for
it.


Question:
Would a GDP measure be improved by excluding foreign interest paid?

The income method of calculating GDP is as follows: GDP = wages + profits + rents + interest + depreciation + taxes + NFFI. If an economy has high external debt, for instance, because it used external financing to buy machinery and equipment, then foreign interest payments will be high. In that case, wouldn't GDP (per capita) be a poor measure of economic well-being since a significant portion of the generated income is leaving the home economy?

Wouldn't excluding foreign interest payments in calculating GDP/ income give us a better measure since this represents what income is available to the home economy?

Explanation: The essential question is to ask the linkage between GDP and wellbeing. We can check their measures.

$\begingroup$

  1. GDP is measure of output not a direct measure of wellbeing. You can use it as a proxy for wellbeing because it has very high correlation with broader measures of well being (e.g. see this [ OECD explainer ](https://www.oecdbetterlifeindex.org/blog/well-being-and-gdp.htm#:%7E:text=The%20chart%20below%20demonstrates%20this,being%20is%20higher%20on%20average.) ).

  2. If country, on net basis, pays income to foreigners such as interest payments NFFI will be negative.

NFFI= Income of our citizens from foreign countries - Income of foreign
citizens from our country.

So in your example, GDP is lower if the interest income is paid to other
countries.


Question:
Is there a diagram outlining the life of a dollar?

I would like to understand the economic system concretely. My reading leads quickly into graphs and theory, which is interesting but not what I'm looking for. Instead, I imagine I should be able to trace the path of a dollar from my pocket through the major components of the economic system (the central bank, commercial banks, investors, companies, tax, government spending, government borrowing...)

Explanation: This is related to the circular flow in which the major exchanges are represented as flows of money, goods and services, etc.

$\begingroup$

This is called the **circular flow of income** . A simple model demonstrates
the exchanges between households, business and government:

[ ![Three-sector circular flow diagram](https://i.sstatic.net/Y2R7t.jpg)
](https://i.sstatic.net/Y2R7t.jpg)

More complex models include additional _economic agents_ such as the foreign
sector (imports, exports, foreign investments) and the financial sector
(banks). Some of these can be sources of money (banks can "create" money
through credit).

The original image is in fact such a diagram. (Thanks @1muflon1 for pointing
this out.) You probably want to start with one of the simple diagrams and add
details from there.

Source: [ https://en.wikipedia.org/wiki/Circular_flow_of_income
](https://en.wikipedia.org/wiki/Circular_flow_of_income)


Question:
US population growth: "natural increase" vs "fertility rate"

Based on the 2017 US Census population projections through 2060, specifically table 1 (Projected population size and births, deaths, and migration), the "natural increase," which is US births - US deaths, was positive in 2017 at over 1 million more births than deaths, and was projected to remain positive through 2060, reaching a minimum of 400,000 in 2050 before beginning to increase again.

On the other hand, the fertility rate per woman for the US was 1.8 in 2017, according to the World Bank. This is well below the replacement rate of 2.1.

How is it possible that the US could have over 1 million more births than deaths, and that a positive natural increase would be projected to continue for 40 years, but be well below replacement fertility rate?

This question is related, but the answers there indicate that it would be temporary situation due to population momentum. However, here the Census Bureau is predicting it will continue for 40 years.

Explanation: This is also affected by immigrants. We need to take their numbers into calculation.

$\begingroup$

**Short answer:**

The “natural increase” in population, defined as births in the U.S. minus
deaths in the U.S., in the spreadsheet you linked is affected by immigration.

**Longer answer:**

Definition of TFR...

“sum of age-specific fertility rates (usually referring to women aged 15 to 49
years)”

Source... [ https://www.who.int/data/gho/indicator-metadata-registry/imr-
details/123 ](https://www.who.int/data/gho/indicator-metadata-registry/imr-
details/123)

The TFR in the U.S. in 2017 was 1.7.

Source... [ https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=US
](https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=US)

The 2017 TFR was calculated from age-specific fertility rates of women born
between 1968 and 2002 or a similar period. Since it uses historical data we do
not need to question it. We can be critical of how it can be applied as a
guide to the future if we so choose.

The under the same method births in 2060 depend upon women born between 2011
and 2045 and their TFR is unknown. Suppose we assume it will still be 1.7
because suppose we want to assume a huge change such as between 1960 and 1976
will not happen again. Births in 2060 will also depend upon immigration of
women born between 2011 and 2045 and we only have data on 2011 through 2023.
That means births in 2060 depends upon unknown amounts of future immigration
between 2023 and 2045. A 30 year old immigrant today was born in 1993 so she
won’t directly affect births in 2060. However, she can potentially give birth
to a female in the next several years and that child will likely be in the
child-bearing age range in 2060. (Immigrants often apply for family re-
unification so some children might arrive later and about half of those
children are female. An infant female arriving today will be 37 in 2060 and
that is in the child-bearing age range.)

Deaths in 2060 depends upon births around the year 1980, whether born in the
U.S. or born elsewhere and immigrated at any time before 2060. That means
deaths in 2060 depends upon unknown amounts of future immigration between 2023
and 2060. A 30 year old immigrant today still has a good chance of being alive
in 2060 at the age of 67. (Immigrants often apply for family re-unification so
some children might arrive later and they have a smaller chance of dying in
2060.)

Immigrants tend to be young, **at the time they immigrate** , so the “natural
increase”, as defined, can be positive between 2023 and 2060 even if TFR
remains 1.7 from 2017 to 2060.

A quote...

“The average age of newly arrived legal and illegal immigrants was 31 years in
2019”

Source... [ https://cis.org/Report/Immigrants-Coming-America-Older-Ages
](https://cis.org/Report/Immigrants-Coming-America-Older-Ages)


Question:
Specific term for disincentivized "doing something first"

Of course we can use "moral hazard" but we can use "moral hazard" for many things. Tragedy of the commons is a moral hazard (maximize your utility before the rest of the public wises up). I want a greater degree of specificity, so I'm looking for a term that is comparable to tragedy of the commons (in other words I want it to sound legit and still be specific).

The situation is:

One group innovates, the others copy the first group. Importantly, the groups that copy reap similar rewards to the first group. The result is an environment that does not foster innovation.

I initially thought this was a type of tragedy of the commons but it's not what's being used up, it's about what never gets initiated and worked on.

Question
Is there an economics term to describe this type of situation? Either macro or micro economic setting would work. (Note: it doesn't have to be about "innovation" per se, just this general mechanism that weighs on the first group because it knows other groups will copy.)

Explanation:
If I understand it correctly, you are making these core assumptions:

If nobody innovates, no profits are generated.

Innovating pays off, but is costly.

Copying pays off as well, and is not costly, but it needs an innovator to copy from.

The simplest model of this is a static normal form game: There are 𝑛≥2
 groups. Each group can either choose 𝐼
 (innovate) or 𝐶
 (copy). Choosing 𝐼
 has a constant payoff of 1
. Choosing 𝐶
 has a payoff of 𝑏>1
 if at least one group chooses 𝐼
, but a payoff of 0
 if nobody chooses 𝐼.

$\begingroup$

If I understand it correctly, you are making these core assumptions:

  1. If nobody innovates, no profits are generated.

  2. Innovating pays off, but is costly.

  3. Copying pays off as well, and is not costly, but it needs an innovator to copy from.

The simplest model of this is a static normal form game: There are  $n\ge 2$
groups. Each group can either choose  $I$  (innovate) or  $C$  (copy).
Choosing  $I$  has a constant payoff of  $1$  . Choosing  $C$  has a payoff of
$b>1$  if at least one group chooses  $I$  , but a payoff of  $0$  if nobody
chooses  $I$  .

This game is known as the [ _Volunteer's Dilemma_
](https://www.jstor.org/stable/174243) .

(BTW: Neither the Volunteer's Dilemma nor the Tragedy of the Commons are
instances of _[ moral hazard ](https://en.wikipedia.org/wiki/Moral_hazard) _
properly understood.)


Question:
KPIs re-indexing after some years

I just realized that eurostat CPI index has three values of reference:

1996, 2005, 2015

https://ec.europa.eu/eurostat/databrowser/view/PRC_HICP_MANR__custom_120601/bookmark/table?lang=en&bookmarkId=952bcf60-22e8-433b-ab93-fe85e2ab2367

https://ec.europa.eu/eurostat/cache/metadata/en/prc_hicp_esms.htm#ref_period1682076048145
Being myself an engineer, not that familiar with economy KPIs, I wonder:

What need does this re-index tries to solve, or why is it performed?

Thank you so much!!

Explanation: This is related to base shift, where new products are introduced, leading to changes in CPI calculation.

$\begingroup$

This is so-called base shift. It was typically done every 5-10 years by
various statistical offices, although now some do it on yearly basis.

The reason why this is done is that CPI does not actually look at all prices
but just some sample of representative prices. This had to be done because,
especially in the past, but to some extent even now, data collection is
extremely expensive so statistical offices would not be able to afford to
track all prices. Nowadays, there are indices that are more comprehensive like
[ the billion prices project ](https://thebillionpricesproject.com/) but such
methodology is not widely used by statistical offices yet.

However, using representative basket of goods introduces problem when consumer
spending patterns shift, since to make index consistent you need to compare
the prices of the same basket of goods. So once in a while statistical office
selects new base and recalculates everything in terms of the basket of goods
used in that year. This can be done even to the old data since what usually
changes are shares of how much households spend on lets say food vs travel
etc. This is pretty much the main or even only reason, other than this the
selection of base is purely arbitrary but you might change it once in while to
make graphs from raw data more readable (of course any researcher can easily
rebase the CPI, but I suppose many sites that source data from statistical
offices just take default raw data).

This [ CBS website ](https://www.cbs.nl/en-gb/background/2005/26/consumer-
price-index) also further explains the base shift if you are interested.


Question:
Log Transformation of Zeros (Slave Trade Data)

I am trying to log transform data on slave trade voyages from the Database by David Eltis,The Trans-Atlantic Slave Trade Database.

The Problem I am facing: Many values are 0. My first idea was to assign value 1 to all values which are 0, so after log transforming they are 0. However, since I am taking average voyages per year, for many years the value is < 1, leading to negative values after the log transformation.

So now I have smaller values for years in which there was slave trade (but <1) compared to years when there was no slave trade.

How does one adress such a problem?

Explanation: One alternative is to use another transformation that is "sufficiently" close to the log transform. The inverse hyperbolic sine function is very popular.

$\begingroup$

Taking the logarithm of  $0$  is impossible. This is a frequent occuring
problem with econometricians who insist on using the log transform while
having data with (many) zeros.

There are a few options, none of which is entirely satisfying:

  * drop the data for which the dependent observable is zero (this raises issues of sample bias).
  * Use another transformation that is "sufficiently" close to the log transform. The inverse hyperbolic sine function is very popular (however one should be careful in interpreting the coefficients, see for example [ Bellemare and Wichman (Elasiticites and the Inverse hyperbolic sine transformation) ](https://marcfbellemare.com/wordpress/wp-content/uploads/2019/02/BellemareWichmanIHSFebruary2019.pdf)
  * Use a different econometric specification. If you have count data (like in your case), a Poisson (or negative binomial) specification might be more appropriate.

Simply adding a 1 to all data to avoid observations with 0 is (I think) not a
very good idea as it is unclear how to interpret the estimated coefficients.
However, there might be others that disagree with me on this.


Question:
Samsung's contribution to South Korea's GDP

Many articles or sources mention that Samsung's contribution to South Korea GDP is approximately 20%. Checking its financial statements in 2022 for example, I see that the revenues amount to 234 billions of US dollars which only represents 13% of South Korea's GDP (1665 billions of US dollars according to the world bank). Since the value added must be less than revenues, the contribution to GDP should be less than 13%. Am i missing something ?

Thank you

Explanation: Accounting definitions of revenue have their own rules about the timing of revenues that may may have different timing assumptions than the economic concept of GDP does about when economic activity takes place. We need to check those rules.

$\begingroup$

Accounting definitions of revenue have their own [ rules about the timing of
revenues ](https://www.firmofthefuture.com/accounting/timing-is-everything-
with-asc-606-the-new-revenue-recognition-standard/) that may may have
different timing assumptions than the economic concept of GDP does about when
economic activity takes place. But this is probably at its most serious a
second order concern. I agree with you that revenues should be an approximate
upper bound on contribution of a firm to GDP. In practice, it is likely far
less for several reasons:

  1. Inputs contribute to the cost of production but are not part of the output of a firm. For example, if you buy car parts and assemble them into cars, the costs of the cars will be reflected in your sales but it isn't your output.
  2. In an internationally active firm, some firm output should sometimes be counted in the GDP of other countries. For example, if you make cars in the US and China, you are going to contribute to the GDP of both countries but your sales will reflect both countries' output.

For a domestic firm, in a setting where GDP = GDI, we can think of the firm's
contribution to GDP as the contribution to income. That turns out to be,
simplifying a bit, Salaries + Interest on Debt + Profits (After Tax and
Interest). That's going to be a deal less than revenues, because sales will
also include the costs of other inputs.


Question:
Why did the pay of CEOs decrease around the year 2000?

According to the book I'm reading (*), the pay of CEOs tends to increase because the divorce between ownership and control allows for abusive compensation practices by the CEOs. Indeed, in the graph below we can see a near exponential rise in CEO compensation (measured as the ratio between the wage of the CEO and that of the average worker) since the 70s. I've found many sources discussing this topic, but none on the decreasing spikes in the years 1994-95 and the early 2000s. Why did this happen?

Explanation: This is related to the fact that the compensation/pay to CEO is tied with stock, which is a variable.

$\begingroup$

2001 was the time the dot-com bubble burst. CEOs and other highly ranked
employees get most of their income from bonus payments, which are often tied
to stock prices and revenues, and the like (which all suffered). 1994 was due
to a weak stock market, and few executives exercised their options; hence,
total compensation took a temporary dip. There was also a reform by the
Clinton administration around this time, which was capping the tax
deductibility of employee compensation. This will unlikely have had a major
impact since the majority of CEO compensation is performance-based, which was
exempt from the cap.

According to [ the Institue for Policy Stduies - A Decade of Executive Excess:
The 1990s Sixth Annual Executive Compensation Survey September 1, 1999
](https://ips-dc.org/wp-content/uploads/1999/09/Executive-Excess-1999.pdf) :

> Of course, the biggest contributor to exorbitant CEO pay is stock options,
> which are variable. Indeed, when the stock market was weak in 1994, fewer
> executives exercised their options and total compensation took a dip.
> However, most executives still enjoy gen- erous base pay packages and in
> fact in 1994 a record number earned more than $1 million.


Question:
Is there a name for relative diminishing returns, or relative increasing opportunity cost?

Consider the following hypothetical situation:

You are producing something where the total amount produced, 𝐴
, is equal to the product of two factors, 𝑋
 and 𝑌
. Hence 𝐴=𝑋∗𝑌
.

𝑋
 and 𝑌
 both cost $1 to increase by 1.

In this situation, 𝑋
 is not said to have diminishing returns, because holding other factors constant, 𝑋
 has linear returns. Increasing 𝑋
 by 10% will increase output by 10%, and increasing 𝑋
 by 100% will increase output by 100%.

𝑋
 is also not said to have increasing opportunity cost, because the opportunity cost of increasing 𝑋
 by 1 is equal to increasing 𝑌
 by 1, regardless of how many 𝑋
 or 𝑌
 you have.

By symmetry, the same arguments are true for 𝑌
.

However, if 𝑋=20
 and 𝑌=10
 (and 𝐴=200
), then by reducing 𝑋
 to increase 𝑌
, for the same cost, you can increase output by having 𝑋=15
 and 𝑌=15
, so 𝐴=225
. Also, by spending $1 on 𝑋
, you would increase output by 5%, while by spending $1 on 𝑌
, you would increase output by 10%.

In general, increasing one factor will increase the returns of the other factor, and by extension, diminish the relative value of that factor (or increase the opportunity cost in terms of the output, but not in terms of dollars or the alternative purchase).

This situation is very common in video games, and because investing too heavily into either 𝑋
 or 𝑌
 would be inefficient, people will often say that both 𝑋
 and 𝑌
 have diminishing returns. However, I've found this to be very misleading, because it implies that 𝐴
 increases by less, marginally, the more 𝑋
 and 𝑌
 you have, which isn't the case. I'm also not sure if it would be accurate to say 𝑋
 and 𝑌
 have increasing opportunity cost, because the cost of both always stay the same.

Is there a name for this kind of factor, and if not, how would you describe it succinctly to get across the idea that having too much of one factor is less optimal than having a balanced amount of both?

Explanation: If the marginal output of one factor increases with the amount of the other factor, the two factors are said to be complements in the production. It is related to supermodular/submodular functions.

$\begingroup$

If the marginal output of one factor increases with the amount of the other
factor, the two factors are said to be complements in the production. See [
here ](https://en.wikipedia.org/wiki/Supermodular_function) for the wikipedia
link.

This is the case if the production function is supermodular: in case of
differentiability this amounts to a positive cross partial derivative:  $$
\frac{\partial^2 A}{\partial X \partial Y} > 0\. $$  There is a huge
literature in economics on supermodularity and complementarity as it is
tightly related to comparative statics and provides useful equilibrium
existence results (e.g. [ Milgrom and Shannon, 1994
](https://www.jstor.org/stable/2951479) ).


Question:
Proving existence of a unique pure strategy Nash Equilibrium in two-person continuous games

I am working on a game theory exercise and I want to prove existence and uniqueness of pure strategy NE for a 2 person game with continuous strategy spaces. Lets call the payoff functions 𝜋1
 and 𝜋2
 for players 1 and 2. The strategy spaces are simple one dimensional intervals in Euclidean space that are common across players (𝑠1,𝑠2∈𝑆=[𝑎,𝑏]
). What do I need to do to show that the payoff functions are diagonally strictly concave? I am having a hard time wrapping my head around Rosen's paper and I don't need many dimensional strategy spaces and n players for now. I was wondering if there was a simpler, easy to understand version of the result for my simplified game. If someone could also provide some intuition for that condition, it would also be a massive help! Thanks

Explanation: We need to find formulas, conditions to prove the existence in continuous case.

$\begingroup$

For anyone else who is interested, I found a cool note online and apparently
the following ugly monstrosity is a sufficient condition for strict diagonal
concavity for my simplified case:

$ 2s^2_1 \frac{\partial^2 \pi_1}{\partial s_1^2} + 2s_1s_2 (\frac{\partial^2
\pi_1}{\partial s_1 \partial s_2} + \frac{\partial^2 \pi_2}{\partial s_2
\partial s_1}) + 2s^2_2 \frac{\partial^2 \pi_2}{\partial s_2^2} < 0
\hspace{2mm} \forall [s_1 \hspace{2mm} s_2]^T \neq 0 $

Still no luck on the intuition... Reference: [
https://ocw.mit.edu/courses/6-254-game-theory-with-engineering-applications-
spring-2010/48cb7ae4210825b7de3d7fc0bcc8553f_MIT6_254S10_lec06b.pdf
](https://ocw.mit.edu/courses/6-254-game-theory-with-engineering-applications-
spring-2010/48cb7ae4210825b7de3d7fc0bcc8553f_MIT6_254S10_lec06b.pdf)


Question:
Quadratic Form Single Summation notation

I'm trying to translate what feels like a double summation notation , compacted into a single summation. It's the summation definition of quadratic forms.

𝑄(𝑥1,𝑥2.....𝑥𝑛)=∑𝑖≤𝑗𝑎𝑖𝑗𝑥𝑖𝑥𝑗

I assume quadratic forms can be written as the less compact double summation?

𝑄(𝑥1,𝑥2.....𝑥𝑛)=∑𝑛𝑖=1∑𝑛𝑗=1𝑎𝑖𝑗𝑥𝑖𝑥𝑗

To count this we would:

Fix the outer summation first, so in this case we would be fixing rows and going across columns. Alternately we could switch the summation so we fixed columns and counted rows. This holds for any 𝑛•𝑚
 matrix i believe?
Question: I suppose the 𝑖≤𝑗
 notation has to correspond to this. But it's not immediately clicking?

Explanation: We need to check the definition of double summation to understand the calculation.

$\begingroup$

The sum  $\sum_{i \le j}=a_{ij}x_ix_j$  goes over all indices  $(i,j)$  with
$i\leq j$  . We can do that by either summing over all  $i$  and then for each
$i$  all  $j\geq i$  , which would give us
$$\sum_{i=1}^n\sum_{j=i}^n=a_{ij}x_ix_j,$$  or we could sum over all  $j$  and
then look at  $i\leq j$  , which would give us
$$\sum_{j=1}^n\sum_{i=1}^j=a_{ij}x_ix_j.$$

However, for [ general quadratic forms
](https://en.wikipedia.org/wiki/Quadratic_form) , one does not restrict to
$i\leq j$  , which would correspond to the additional restriction that
$a_{ij}=0$  for  $i>j$  , which need not hold in general.


Question:
Derivative to ln(K(t)) in the RBC model

In the calculation of the equation of motion for capital in the RBC model, I came across this equation:

d ln K_(t+1) / d ln K_t = (d K_(t+1) / d K_t) * (K_t / K_(t+1))

Can someone explain what are the mathematical steps in between? I don't see how exactly the derivative to ln(K(t)) gets us an almost elasticity-like equation.

Would be thankful for any leads. :)

Explanation: This is related to elastic substitution. We need to check its definition and some examples.

$\begingroup$

That is the formula of the elasticity of substitution of  $K_{t+1}$  with
respect to  $K_t$  expressed differently. Notice that the differential of the
function  $\ln K_{t+1}$  is  $d\ln K_{t+1}=\frac{1}{K_{t+1}}\frac{d K_{t+1}}{d
K_{t+1}}d K_{t+1}$  (see [ section 12.9
](https://rads.stackoverflow.com/amzn/click/com/1292074612) or [ this
](https://en.wikipedia.org/wiki/Elasticity_of_substitution#Definition) ), then
$d\ln K_{t+1}=\frac{d K_{t+1}}{K_{t+1}}$  . Hence, using the same operation
with  $\ln K_{t}$  and combining we get the elasticity of substitution of
$K_{t+1}$  with respect to  $K_t$  :

$$ \frac{d\ln K_{t+1}}{d\ln K_{t}}=\frac{d K_{t+1}}{d
K_{t}}\frac{K_{t}}{K_{t+1}}. $$


Question:
Why have bank deposits gone down with rising interest rates?

From an opinion piece in the Washington Post:

"Since the Federal Reserve began to raise rates about a year ago, deposits leaving the banking sector have totaled nearly $1 trillion".

Why would bank deposits go down while interest rates are going up? I thought the higher interest rates would attract more deposits.

Explanation: This is probably a consequence of our much misunderstood monetary system in which bank loans create new money and the repayment of (the principal of) those loans destroys money. We need to check the process of Money creation in the modern economy.

$\begingroup$

It's all a consequence of our much misunderstood [ monetary system
](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-
bulletin/2014/money-creation-in-the-modern-economy.pdf) in which bank loans
create new money and the repayment of (the principal of) those loans destroys
money.

Deposits mainly correspond to what the banks owe to its customers, so they can
not really "leave" the banking sector. The reason there are less deposits is
that they expire when loans are repaid. If amount of new loans being created
each day is less than the amount of existing loans being repaid then the
amount of deposits in existence will fall. A higher interest rate reduces
lending (because it discourages borrowing) and so makes this scenario more
likely.


Question:
Why there is no study on the forecasting methods for the exchange rates of CBDCs? What do you think?

What do you think about the predictiion/forecasting the exchange rate of CBDCs?

(CBDC= CENTRAL BANK DIGITAL CURRENCY)

I cannot find any paper on this issue in the literature. But, there are some papers and studies on the forecasting methods for the exchange rate of cryptocurrencies.

I am asking the reasons why there is no study on the forecasting the exchange rates of CBDCs? What do you think? Does this issue make no sense?

My thought is that CBDCs are pegged to the value of that country's fiat currency.

Explanation: We need to check how many countris have launched CBDC, as we can't statistically forecast something without any data.

$\begingroup$

  * As of now there are few actual CBDCs in place China, Bahamas, Jamaica and Nigeria; other countries only have plans to implement them and are still conducting pilot experiments ( [ https://blog.chainalysis.com/reports/central-bank-digital-currencies-cbdc/ ](https://blog.chainalysis.com/reports/central-bank-digital-currencies-cbdc/) ).

You can't statistically forecast something without any data, and maybe there's
not enough available data yet. I think this IMF call for papers ( [
https://www.imf.org/en/News/Seminars/Conferences/2023/11/15/11th-imf-
statistical-forum
](https://www.imf.org/en/News/Seminars/Conferences/2023/11/15/11th-imf-
statistical-forum) ) will probably contain many papers about what you're
asking.

  * CBDCs are being considered as replacement of current currencies and form of making digital payments (see [ ECB ](https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html) ), so there won't be an exchange between regular paper currency and CBDC (at least not officially). It would be like having money on bank account. There will be exchange rate between other currencies but not between physical money and digital money of the same currency.


Question:
Why do all filled bids receive the same rate, which is the rate of the lowest filled bid, during the US Treasury auction process?

This question pertains to the US Treasury auction process. {1} states:

Treasury auctions are designed to minimize the cost of financing the national debt by promoting broad, competitive bidding and liquid secondary market trading.

However, from my understanding, all competitive and noncompetitive bids that are filled receive the same rate, which is the rate of the lowest filled bid.. This seems to contradict {1}, seems it does not minimize the cost of financing the national debt.

Why do all competitive and noncompetitive bids that are filled receive the same rate, which is the rate of the highest filled bid, during the US Treasury auction process?

Explanation: This is related to the design of treasury in enforcing multi-price auction format or single-price auction format. We need to find some pros and cons to these two methods.

$\begingroup$

The explanation is given in [ NY FED - The Treasury Auction Process:
Objectives, Structure, and Recent Adaptations
](https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.pdf)
.

> The Treasury first adopted the multiple-price format when it initiated bill
> auctions in 1929 and it continued to use that format when it introduced
> auctions of coupon-bearing securities in the early 1970s. However, when the
> auction process came under scrutiny in 1991, public officials became
> interested in alternative formats that might appeal to more investors and
> that might lead to lower financing costs. Several academics had suggested
> earlier that single-price auctions might reduce financing costs (see Carson
> [1959], Friedman [1960, 1963], and Smith [1966]). In a single-price auction,
> a participant can bid its actual reservation yield for a new security, that
> is, the minimum yield at which it is willing to buy the security. The bidder
> certainly has no reason to bid a lower yield, but if the auction stops at a
> higher yield it will get the full benefit of buying at that higher yield. In
> contrast, the multiple-price format encourages a participant to bid higher
> than its reservation yield in hopes of getting the security on more
> favorable terms.

Box 2 explains the results from the test auctions that the treasury conducted.

> The Treasury produced two empirical studies of the results of its experiment
> with a single-price auction format: Malvey, Archibald, and Flynn (1995) and
> Malvey and Archibald (1998). The studies calculated—for both single-price
> and multiple-price auctions—the difference between the auction yield of a
> security and the yield at which the same security was trading in the when-
> issued market at the time of the auction. A positive difference indicated
> that the securities had been auctioned at a yield higher than the one at
> which they were trading in the when-issued market. For securities auctioned
> in a multiple-price format, the average difference was statistically
> significantly greater than zero. For securities auctioned in a single-price
> format, however, the studies were unable to reject the hypothesis that the
> average difference was zero. These results suggest that moving to a single-
> price format would lead to lower financing costs.

If you continue reading you will see that the results are not unambiguous.
Nonetheless, the underlying idea is that this design should lead to lower
costs and there is some evidence that it indeed does.


Question:
The Canonical New-Keynesian Model

I'm trying to learn about new-keynesian models hw they were derived. However, I found great difficulty in deriving the equations used in many studies and the lack of books and papers that mention their origin. The following equation (see link slide 7/26, https://slideplayer.com/slide/10639387/) represents the aggregate demand block of the canonical gap model (reduced-form new-keynesian model) which is a s follows,

𝑦̂ 𝑡=𝑎1𝑦̂ 𝑡−1−𝑎2𝑚𝑐𝑖𝑡+𝑎3𝑦̂ 𝑡+1+𝜖𝑦𝑡,
𝑚𝑐𝑖𝑡=𝑎4𝑧̂ 𝑡+(1−𝑎4)𝑟̂ 𝑡.

Where 𝑦̂ 𝑡
 is the output gap, 𝑚𝑐𝑖𝑡
 represents the monetary conditions index, 𝑟̂ 𝑡
 refers to the real interest rate gap, 𝑧̂ 𝑡
 denotes the real exchange rate gap. Can anyone please show how such equation was derived or direct me to its source. Thanks in advance.

Explanation: We need to check the derivation of the model linearized equilibrium conditions starting from the optimization problems and more details into the estimation of the model using bayesian techniques.

$\begingroup$

I would recommend first to check [ Sims' class notes
](https://www3.nd.edu/%7Eesims1/new_keynesian_2017.pdf) in Graduate Macro
Theory. I think it is both very gentle and straightforward introduction to
this kind of models. In these notes he derives the model linearized
equilibrium conditions starting from the optimization problems.

Once you've read Sims notes, probably you want to check [ Fenandez-
Villaverde's "A Baseline DSGE Model" notes
](https://www.sas.upenn.edu/%7Ejesusfv/benchmark_DSGE.pdf) in which he
develops essentially the same model but including some extensions, plus some
insights into the estimation of the model using bayesian techniques.

If you want to understand these types of models in a more general way and in
more depth, I'd recommend the book [ Recursive Methods in Economic Dynamics
](https://www.hup.harvard.edu/catalog.php?isbn=9780674750968) by Stokey, Lucas
and Prescott, which is the standard reference. This book develops the
recursive approach to model economic problems while providing the necessary
math background, although you are supposed to have some exposure in proofs and
real analysis before going into this reading.

In line with the last recommendation is [ Recursive Macroeconomic Theory
](https://mitpress.mit.edu/9780262038669/recursive-macroeconomic-theory/) by
Ljungqvist and Sargent. This book offers a wider range of topics than SLP, but
is also more referencial to my taste since it assumes a some mathematical and
rigorous-macro background.

**TL;DR** . [ Sims' class notes
](https://www3.nd.edu/%7Eesims1/new_keynesian_2017.pdf) will give you some
working knowledge in NK models; Go into [ Fenandez-Villaverde's "A Baseline
DSGE Model" notes ](https://www.sas.upenn.edu/%7Ejesusfv/benchmark_DSGE.pdf)
if you want to get a little bit further. Check [ Recursive Methods in Economic
Dynamics ](https://www.hup.harvard.edu/catalog.php?isbn=9780674750968) and [
Recursive Macroeconomic Theory
](https://mitpress.mit.edu/9780262038669/recursive-macroeconomic-theory/) if
you want to _really_ understand these types of models.


Question:
Which covariates can I include in my fixed-effects regression?

I am doing a difference-in-difference analysis of an event that affected several states in the US. I am interested to understand the effects of this event on state-level unemployment rates. I have state level data on demographics for several years before and after this event. My question is what covariates should I include if I am estimating equation of the following form:

unempRate𝑗𝑡=𝛾𝑗+𝛼𝑡+𝛽𝐷𝑗𝑡+𝛿𝑋𝑗𝑡+𝜖𝑗𝑡

where 𝛾𝑗
 are state-fixed effects; 𝛼𝑡
 are time fixed effects; 𝐷𝑗𝑡
 are dummies - 1 if state 𝑗
 is affected at time 𝑡
, and 0 otherwise; and 𝑋𝑗𝑡
 are time-varying state level covariates. Coefficient of interest is 𝛽
.

So far, I have included population and average household income at the state level.

What more covariates can I include? How does one decide which covariates to include in a setting like this? What is the guiding philosophy?

Explanation: We need to understand back-door criterion via Directed Acyclic Graphs (the average causal effect (ACE) of a treatment X on an outcome Y).

$\begingroup$

Understanding back-door criterion via Directed Acyclic Graphs ( [
http://causality.cs.ucla.edu/blog/index.php/category/back-door-criterion/
](http://causality.cs.ucla.edu/blog/index.php/category/back-door-criterion/) )
helped me understand how to add covariates on my econometric model. While
studying the material, I also found a wonderful website that tells which
variables to condition on and how to test whether the DAG you draw is correct:
[ http://www.dagitty.net/dags.html ](http://www.dagitty.net/dags.html)


Question:
A question on Marx' "Value, price and profit"

In his lecture Value, price and profit Karl Marx argues that profit is made by capitalists by (i) selling commodities for their real price (= real value expressed in money), (ii) paying the workers (down the complete supply chain) as wages the real value (expressed in money) of the commodities they produce but (iii) letting them work more time than needed for the production of these commodities (= produce more commodities, but unpaid for).

I don't understand why he insists on (ii) and (iii) instead of just saying that the capitalists pay the workers simply less than the real price (by which they sell the commodities).

What's the difference between "working full time for half wages" and "working half time for full wages and half time for no wages"?

Explanation: We need to check the description of value, price or profit by Marx to catch up the meaning.

$\begingroup$

Your summary of Marx's argument in these lectures is inaccurate. In these
lectures too, Marx advances his known theory of surplus. He does not say that
capitalists pay to the workers the full value of the commodities the workers
_produce_ , but the full value needed for the workers and their families to
survive.

**[ Quote ](https://www.marxists.org/archive/marx/works/1865/value-price-
profit/ch02.htm#c10) **

> We must now return to the expression, “value, or price of labour.” We have
> seen that, in fact, it is only the value of the labouring power, measured by
> the values of commodities necessary for its maintenance.

Marx argument is the well-known one: when you work  $H$  hours, you produce
$Y$  goods that are more than you need to survive -but you are paid only
$W<Y$  goods, where  $W$  is the goods that you need in order to survive. The
rest is the surplus, which due to the socioeconomic structure is kept by the
capitalist (and maybe others like landlords), but _it should_ be given to
labor because it was labor that produced it, since "capital" does not possess
this "surplus-creating property".

Marx's picture is not "you work 8 hours but by abusing as an individual my
power over you I only pay you for 4 hours" but "your wage is determined, _by
the socioeconomic system_ , as what you need to survive, not as the value you
produce. So I pay you what the system dictates, I am not "exploiting" you in
the traditional sense of the word. Still, because you produce more than what
you need to survive, I can sell the products at their "real/fair" price (so I
do not exploit the consumers either) and still see a surplus -which I keep,
because the system is what it is".


Question:
Do inheritances break Piketty's r>g model's conclusions?

In Capital in the Twenty-First Century Piketty suggests that if the return on capital is higher than the economic growth, then wealth inequality in society will rise.

Yet, this model seems to ignore that people leave their inheritance to more than one person on average and form marriges with people of not ideally equal wealth. I.e. if a billionare marries a millionare and have three children to whom they pass their wealth after 50 years, they'll pass $1000𝑚+$1𝑚3(1+𝑟)50
 to each of them, making the society more equal if r is small enough.

Does such effect of inheritances break the model's conclusions (and inequality may decrease when r is significantly higher than g) or the effect is negligible?

Explanation: We need to check more details about Piketty's model

$\begingroup$

It actually does not change conclusions from his model. Piketty's model is not
about income inequality per se, it is about inequality between capital's and
labor's share of income. Piketty's model does not even have heterogenous
agents with different wealth or income in it. It has separate capital incomes
and separate labor incomes, but the model does not even explicitly model these
as two separate groups. What happens in the Piketty's model is that when
$r>g$  the share of total GDP that goes to capitalists as a whole class
increases. The model is not about inequality between individual capitalists.
If the capitalist class would be very large they might be even poorer than
workers per capita, Piketty's model does not analyze it at all. Piketty does
argue that this should lead to more inequality in real world because he argues
in real life capital _tends_ to be concentrated but that is not _direct_
conclusion of his model which only makes predictions about income shares (see
overview of Piketty's model in [ Gusella 2020
](https://www.researchgate.net/publication/352198040_Notes_on_Piketty%27s_model)
).

As such you proposed modification would not change the conclusions from
Piketty's model since the inheritors of those millionaires (assuming they do
have zero labor income) would be still members of capitalist class. If
capitalist class gets 30% of GDP (lets say GDP is 100) then regardless whether
there are 100 capitalists each getting 0.3 or 1 capitalist getting whole 30
they are still getting 30% of GDP in either case. Piketty's model just says
that this share will be increasing always as long as  $r>g$  so labor will be
getting smaller and smaller share, but this is not the same income inequality
amongst individuals but classes of people.


Question:
What will be the Effect of the Russian oil Price Cap

G7 countries have just announced that they will not buy oil from Russia unless the price is USD 60/barrel or below. What will be the effect of this cap- will it be an effective economic sanction? Why can’t Russia sell the oil to a non G7 intermediary who sells it to G7? And what will it do to the market price of oil ?

Explanation: One effect could be the reduced revenue to Russia.

$\begingroup$

> What will be the effect of this cap- will it be an effective economic
> sanction?

The effect will be that Russia gets less revenue from EU and the west for the
sale of their oil.

Yes, according to economic theory, it will likely be an effective sanction.
Contrary to many sanctions on Russia prior to this, this is actually a 'smart'
sanction. That is, this sanction actually has some economic rationale behind
it. Although for oil it would be best if we would use tariffs, price cap makes
more sense with gas, it still is more sensible than total embargo (see [
Mikhail et al 2022
](https://www.zora.uzh.ch/id/eprint/222702/1/172987_global_economic_consequences_of_the_war_in_ukraine_sanctions_supply_chains_and_sustainability.pdf)
).

> Why can’t Russia sell the oil to a non G7 intermediary who sells it to G7?
> And what will it do to the market price of oil ?

They can but they can only do that at a discount. So this hurts Russia's oil
revenue. There is also consensus among economists this will hurt the revenues
of Russia (see [ here
](http://eprints.lse.ac.uk/116998/1/businessreview_2022_09_28_will_an_oil_price_cap_manage_to_reduce_the.pdf)
).

The reason why this sanction is more rational than pure embargo is that under
embargo you can still have resale of oil (which still hurts due to discounts),
but it does push the oil price higher for EU so it unnecessarily damages
European economies, and the point of sanctions is to hurt the other side, not
to shoot yourself in the foot. In this case, if the cap is chosen at the
optimal level (which can be debated), the sanction might simultaneously lower
Russian oil revenue while preventing the price of oil to get too high so that
either Russia offsets its losses due to price increase or it hurts EU
economies too much. At the same time it minimizes the damage to the European
economies. Again one can debate whether the right price was chosen to achieve
this goal, and for oil a tariff might be better, but in principle this is much
more rational than let's say an embargo.


Question:
Effects of retirement and unemployment on PPF

Which of the following will not shift a country's production possibility frontier (PPF) ? An increase in the age at which people retire or a fall in unemployment ?

To me, it is the increase in the age at which people retire that will not shift the country's PPF, this situation will represent a point in the bounded area (by the PPF, the axis and the origin), meaning that we can produce more but the PPF is not shifted, we still have the same technology and tools to produce. If a country can produce 100 cars and 50 tons of wheat, then if the people retire later, I do not see why the PPF could shift.

In the other hand, a fall in unemployment can imply more workers in development sectors of new technologies so it will shift it, we can produce more.

The correct answer was apparently fall in unemployment. This is very strange to me, according to me justification. I believe that if we make the assumptions that workers can only be employed in PPF sectors, then yes, a fall in unemployment will not shift the PPF. But that means that there are no people working in labs, in science, in developing new technologies etc. There are only people producing wheat and cars... Also, the question is not indicating by how much is the increase of age, so we can be very annoying, saying if I increase the age of retirement by 1 year or 1 day, it surely won't shift the PPF...

Also, mathematically speaking if fall in unemployment does not shift the PPF, then a rise in unemployment does not shift the PPF neither. And an increase at the age at which people retire ⟹
 a rise in unemployment ⟹
 no shift of PPF. So for me an increase in the age at which people retire will not shift a country's PPF.

Who is right there ?

Explanation: An economy with unemployment is not fully utilizing its ressources. We may refer to PPF for more details, which shows all the possible options of output for two goods that can be produced using all factors of production.

$\begingroup$

You can google [ PPF unemployment
](https://www.google.com/search?q=%22unemployment%22+ppf+frontier) and [ PPF
retirement age
](https://www.google.com/search?q=%22retirement%22+ppf+frontier) . One of the
first entries, ` homework.study.com ` discusses both circumstances.

In any case, a  $\color{blue}P$  roduction  $\color{blue}P$  ossibility
$\color{blue}F$  rontrier (  $\color{blue}{PPF}$  ) represents all possible
combinations of output that can be produced by fully and efficiently utilizing
all factors of production. See for example [ Wikipedia
](https://en.wikipedia.org/wiki/Production%E2%80%93possibility_frontier) . It
is clear that an economy with unemployment is not fully utilizing its
ressources (labour force). The Wikipedia article also offers a formula for a
simple non linear frontier with two goods (linear would do as well).

$$q2 = (q1 - 7/2)^{-1} + 7/2$$

where q2 and q1 are the quantities for each product. In the simplest case,
there are only workers, and no technology or capital. In this case, you can
just think of 7 being the number of workers (say millions).

Below, I use [ Julia ](https://julialang.org/) to plot this.

    ppf=[(unit -7/2)^-1 + 7/2 for unit in 0:0.1:(7/2)]
    area = [0 for i in ppf]
    plot(0:0.1:(7/2),ppf, label = "PPF",fillrange = area, fillalpha = 0.35, c = 3)
    title!("PPF Example Wikipeadia")
    ylabel!("Quantity of second good Q2")
    xlabel!("Quantity of first good Q1")
    ylims!((0.0,5))
    xlims!((0.0,5))
    annotate!([1.25], [1], ["possible region"], :green)
    annotate!([3.5], [3.5], ["not possible region"], :red)
    annotate!([collect(0:0.1:(7/2))[length(ppf)-length(ppf[ppf .< (1.5-7/2)^-1 + 7/2])-1]], [(1.5 -7/2)^-1 + 7/2].-0.11, ("*", :blue, :left))

[ ![enter image description here](https://i.sstatic.net/uNSvn.png)
](https://i.sstatic.net/uNSvn.png)

This is more or less identical to the picture from Wikipedia but I added a
blue dot representing the point where q1 = 1.5, which means q2 = 3. In this
case, there is full employment and the economy is working at full capacity.

Adding a few lines similar to [ this answer
](https://quant.stackexchange.com/a/69780/54838) makes the chart interactive.
Unemployment means that only a subset of the entire labour force will be used
as can be seen [ here
](https://www.google.com/search?q=labour+force+employment+unemployment&sxsrf=ALiCzsa7gTY2H2GiDGrB9Vv5UhVkcP4lhg:1669329545989&source=lnms&tbm=isch&sa=X&ved=2ahUKEwjn5-eU8cf7AhXUSfEDHfEPDdoQ_AUoAnoECAIQBA&cshid=1669329562336205&biw=1536&bih=792&dpr=1.25)
.

$$ Labour \ Force = Employed + Unemployed$$

Hence, if you subtract unemployed from the labour force you end up with the
number of employed people and a production that is not at full capacity.

[ ![enter image description here](https://i.sstatic.net/Togy2.gif)
](https://i.sstatic.net/Togy2.gif)

Increasing the workforce moves the PPF outwards. People who retire, would [ no
longer be part
](https://www.econport.org/content/handbook/Unemployment/Define.html#:%7E:text=Labor%20Force%20Participation%20Rate&text=In%20addition%2C%20students%2C%20retirees%2C,called%20labor%20force%20participation%20rate.)
of the labour force, resulting in a downward shift in the PPF. Now at any
given time, these people are not retired yet and it will not impact the PPF
immediately. However, as soon as the first person would be retired under the
old system, the PPF looks different.

[ ![enter image description here](https://i.sstatic.net/FBVj5.gif)
](https://i.sstatic.net/FBVj5.gif)


Question:
At what point would negative accounting equity for a central bank have macroprudential implications?

The yardstick for central bank "health" and/or "credibility" can be nebulous at times. It is sometimes argued that a balance-sheet assessment only does not capture the nuance of a central bank because the central bank's true "asset" is its ability to print money. But by the same token, central banks are now becoming bigger buyers of certain securities. In the case of Japan, the BOJ has over 50% of some maturities. The point being that when a central bank is expected to play a meaningful role when crises emerge, then it's "liabilities" will also be incalculable.

For commercial banks, equity serves as a quasi-clawback provision as it allows creditors to get repaid should the bank encounter extreme solvency issues. But for central banks, I'm not sure what "equity" really signals to anybody.

Question
At what point does negative accounting equity register on the broader macroprudential radar and why? I suppose that even though one cannot have a "run" on a central bank, it could be seen as a BOP or FX crisis.

Explanation: The central bank is different from commercial banks, e.g., the risks may be also different.

$\begingroup$

> At what point does negative accounting equity register on the broader
> macroprudential radar and why?

It does not. The reason why is that negative equity does not pose any
macroeconomic risk as such it cannot be registered by the 'macroprudential
radar'. As argued by [ David Archer and Paul Moser-Boehm (2013)
](https://www.bis.org/publ/bppdf/bispap71.pdf) :

> Central banks are not commercial banks. They do not seek profits. Nor do
> they face the same financial constraints as private institutions. In
> practical terms, this means that most central banks could lose enough money
> to drive their equity negative, and still continue to function completely
> successfully. For most central banks, one would have to go far to construct
> a scenario under which they might have to compromise their policy objectives
> in order to keep paying their bills.

Negative equity simply does not pose any macroprudential risks whatsoever.
There are political risks, or to be more precise risks of politicization of
central bank, but no macroprudential risks ( [ Stella 1997
](https://www.imf.org/external/pubs/ft/wp/wp9783.pdf) ).

> I suppose that even though one cannot have a "run" on a central bank, it
> could be seen as a BOP or FX crisis.

Central bank does not need equity for FX intervention, and central bank equity
does not matter for BOP as central bank equity does not constrain the quantity
of CB reserves.


Question:
Would the more robust global economy resulting from the abolition of trade be worth any costs? What would happen to the economy?

How can a giant volcanic eruption devastate the world? Aside from the immediate fatalities, the eruption can devastate the world’s economy and climate cannot be understated. A good comparison would be the last recorded magnitude 7 eruption in Tambora. While the death toll was severe, it impacted the entire world. The eruption launched huge amounts of volcanic ash, water and sulphuric acid into the atmosphere, obscuring the Sun and repelling some solar radiation. The Tambora eruption’s volcanic winter hit hard in 1816, which has become known as the Year Without a Summer. Temperatures dropped worldwide and climate and weather changes were felt everywhere. But Europe and North America were arguably the most severely hit, with lakes and rivers being frozen over in July and August. Crop damage was rampant, harvests ruined and food shortages widespread. Food prices skyrocketed and violent riots erupted. Malnourishment soon became a severe issue, facilitating disease epidemics that killed tens of thousands. Could it get worse? The world is already experiencing severe food shortages and rising prices, though these were largely caused by inflation and the Russo-Ukraine War. However, incidents like this, the COVID-19 pandemic and the blocking of the Suez Canal serve to underscore just how fragile the global supply chain is.

Given these risks, would it be better for the economy to abolish trade completely and develop a principle of self-sufficiency, where a state will attempt to find any way to make and obtain its resources and products completely by itself if it is even remotely possible to do so? Would the increased robustness of an autarkic economy outweigh any economic costs (many of these could be alleviated by gradually making the switch) such as increased expenditure on finding ways to obtain certain resources without trade? Also, what would happen to the global economy as a whole? Which countries would be most and least affected and in what ways?

Explanation:
We could check some examples, e.g., the consequences of Brexit for
UK trade and living standards.

$\begingroup$

> Given these risks, would it be better to abolish trade completely and
> develop a principle of self-sufficiency, where a state will attempt to find
> any way to make and obtain its resources and products completely by itself
> if it is even remotely possible to do so?

No it would not be better abolishing trade completely, if by better you are
asking if countries would have higher material levels of welfare.

For most countries that would mean literally going back to dark ages as some
small countries do not have resources to produce modern technologies (for
example lithium for batteries is available only in few locations around the
world). Big countries such as USA or Russia or China might not go all the way
to stone age but the welfare standards would plunge by decades if not
centuries and most modern comforts would not be widely accessible to public.

Even if we would allow trade in commodities that are not physically present in
home country it would lead to major economic disaster. People trade precisely
because trade is beneficial. Carpenters do not grow their own food, they
specialize in what they can do comparatively better than other people and then
trade for food with farmers. The same way countries specialize in what they
can do comparatively better and then trade. This leads to higher living
standards, because if someone focuses only on farming that person can produce
more food than someone who is not specialist farmer but a jack of all trades
master of none.

In many places that might even cause famines since some countries have higher
population than can be sustained without any import of food (e.g. Singapore).
It would certainly lead to great decrease of human population globally, not
only because it would lead to lack of food.

This being said of course it is technically possible to do it if people would
be fine with massive decrease with living standards. But it would be very hard
since people would try to break law and trade with foreigners anyway (people
smuggle even when there are just minimal restriction on trade) so it would
require very heavy handed response from the government, similar to USSR iron
curtain that every country would have to maintain (e.g. heavily
fortified/guarded border walls). In addition, I do not believe any democratic
electorate would be willing to put out with becoming impoverished so I do not
believe that this would be possible to implement without autocracy. Even if
people would foolishly vote for this they would promptly vote against it once
the effects would become visible.

You can see that on the case of Brexit. Brexit is not even a full autarky
(which is what you propose), it is just exist from free trade area with EU
that makes trade for Britain little bit more difficult, yet it causes
significant loss of welfare (approximately 6.3-9.5% loss in GDP per capita in
long term and immediate loss of about 2.6% in short run - [ Dhingra et al 2016
](http://eprints.lse.ac.uk/66144/) ). As a consequence many voters say now
they would switch their vote ( [ yougov
](https://yougov.co.uk/topics/politics/articles-reports/2021/02/02/britons-
would-vote-remain-are-less-sure-about-re-j) ).

Your proposal would be like Brexit on steroids, the effects would be of
several magnitudes larger.

> Would the robustness of an economy without trade and other benefits I’m not
> sure of right now be worth any downsides, such as economic strain (because
> countries aren’t getting money from trade agreements and are using more on
> attempting to find a way to obtain certain resources without trade)?

This is question for moral philosophers to answer.

Trade makes people better off, it allows them to achieve higher standards of
welfare and it reduces poverty. On the other hand it probably hurts more to be
rich and than having your riches to be taken away from you than always being
poor because people get used to the comfort and if you never experienced good
life then you don't know what you are missing.

A science cannot determine whether the benefit of always being poor and thus
robust to loss of riches is better than being rich with some small but real
probability of becoming poor. That is for moral philosophers to ponder.

It would be equivalent of asking engineer whether costs of building buildings,
with all the modern comforts, in places where there are earthquakes, are worth
the benefit of forcing people to live in tents but having city virtually
immune to earthquakes. After all, if everyone lives in tents then city is
robust to any earthquake because even heavy earthquake will do minimal damage
if there are no firm structures in the city. So is it worth to make the
exchange? That's a philosophical question.

> Also, what would happen to the global economy as a whole?

Without question it would collapse. That would be the largest global recession
world had ever seen. Covid-19 disrupted supply chains and economic activity a
little bit and it caused greater recession than 2008 financial meltdown. This
would be without question largest economic recession in history of mankind.

As already mentioned above even relatively small disruption to UK trade could
lead to 6.3-9.5% loss in national income per capita. Complete autarky would
lead to drop that would be much higher, there are no studies that would
calculate impacts of such far fetched ideas as complete autarky but if
hypothetically some study would say the world output would contract by 5-8
times more it would not raise eyebrows.

Autarky is man-made disruption of world supply chains. The effect on world
economy from a volcano or pandemic that would completely shut down trade will
be similar effect as when politicians decide to shut down trade.

> Which countries would be most and least affected and in what ways?

Geographically small countries with limited resources would be most affected.
They would experience economic collapse and return to low living standards
that our ancestors had in distant past. Geographically large countries with
lot of natural resources would be least affected but they would still
experience significant and in modern times unprecedented drop in living
standards.

* * *

Answer to new edited question:

> Would the increased robustness of an autarkic economy outweigh any economic
> costs (many of these could be alleviated by gradually making the switch)
> such as increased expenditure on finding ways to obtain certain resources
> without trade?

No. Problem with sudden loss of trade is not just that it is sudden, it is the
loss of trade itself. Of course, making the process gradual would ease the
pain little bit, similarly as getting unemployed without severance is worse
than when there is some transitional period with severance, but in the end you
end up unemployed anyway.

Trade itself is beneficial and increases material standards of living (see for
example discussion in Krugman et al International Economics: Theory and Policy
Ch 1-3). Of course, any unexpected negative shock is worse than slow expected
negative shock, but removing trade still creates negative shock.

Here we again can use Brexit as a case study. Brexit did not happen overnight.
First UK leaving EU free trade area took 2 years after article 50 was invoked
(and this article was not invoked immediately after the referendum). So UK
leaving EU was almost 3 year process. In addition, it was not even completely
unexpected shock as polling was showing the vote was very close so people
already had chance to start preparing even before for this eventuality.

Yet as discussed above the Brexit had immediate negative effects, and what
even more, the research estimates that the long-term negative effects will be
even _worse_ then short term ones. This is because trade has not just static
positive effect (it allows economies to produce and operate on higher level)
but it also has dynamic effects that allows countries to progress faster (see
Krugman et al Ch 3). So removing it (even taking the surprise factor out of
the equation) creates double whammy of reducing the production possibilities
of the country immediately and retarding the growth of production
possibilities of the country in the future. Since economic growth is
compounding this can have profound effects over time. If we have two equal
countries starting with 100 GDP per capita but one grows at 2% and another one
at 1% per year then over 100 year period faster growing country will have GDP
per capita of 724.46, and slow growing country 270.48. By removing the
unexpected shock you might be able to mitigate the immediate damage but it
won't help mitigate much if any of the long term damage that is even higher
than the immediate damage.

Again there is a philosophical debate about whether its better to live in
stable poverty, or live at high standards of living with some risks that there
might be periods of time when those standards of living drop. However, there
is no question that material standards of living themselves will be higher in
trading countries (even factoring in occasional disruptions during global
disasters) than in countries under autarky.


Question:
Differences in Differences with Small Violations of Parallel Trends

I am interested (for no particular reason) in estimating a hypothetical Differences-in-Differences model with one period of treatment. However, we observe small non-linear violations of the parallel trends assumption.

For instance, consider wages for IN vs. OH before and after IN implements a new tax policy. We see that prior wages in IN are equal to wages in OH for T = −∞,...,−3,−2,−1
. However, we see that prior wages are 𝜖>0
 higher in OH over the period 𝑇=−5−𝑘,−5
, with 𝑘
 some small-ish natural number. Here, parallel trends does not hold, but we might still expect to be able to observe the impacts of a change in tax policy.

Is there a way to still properly estimate a Differences in Difference estimator under these situations? I imagine that we should see the same point estimate for treatment at time 𝑇=0
, with a penalty term being added to the standard errors of the point estimate which is a function of 𝜖
. That said, I have been unable to find any papers which cover this issue.

Related papers include: https://jonathandroth.github.io/assets/files/HonestParallelTrends_Main.pdf

However, as far as I can tell, that paper deals with differences in trends after treatment, while I am interested in differences in trends prior to treatment.

Explanation: One option is to use synthetic cohort analysis, where we construct a fake control for each treated unit out of linear combinations of control units to maximize the similarity between control and treated units.

$\begingroup$

If you have violations of the parallel trend assumption then you will have
biased estimates of the causal effect (assuming you satisfy the other
assumptions). If you know the maximum that the two series can drift apart over
time or have a functional form that specifies how that difference can arise,
then you can estimate the diff in diff in a bounded way. For example, if IN
has a trend of 2% growth per year and OH has a trend growth of 3%, then adding
a linear time variable to a log regression will result in parallel trends.

You don't need the trends to be identical. Effectively, you need them to be
identical in expectation (see Lechner (2011) [ The Estimation of Causal
Effects by Difference-in-Difference Methods
](https://core.ac.uk/download/pdf/6387069.pdf) ). [ ![Common Trend as an
expectation from Lechner \(2011\)](https://i.sstatic.net/u34uD.png)
](https://i.sstatic.net/u34uD.png)

What I did in my paper, [ Competition and complementarities in retail banking:
Evidence from debit card interchange regulation
](https://www.sciencedirect.com/science/article/pii/S1042957318300184) , is
look at the trends in the pre-treatment period and test if they were
statistically distinguishable. [ ![testing common trend in pre
period](https://i.sstatic.net/qjmHd.jpg) ](https://i.sstatic.net/qjmHd.jpg) .
Of course, you can never test that the common trend in the pre-period would
persist in the counterfactual treatment period in the absence of the
treatment. That can only be assumed.

Another approach is to do a [ synthetic cohort
](https://en.wikipedia.org/wiki/Synthetic_control_method) analysis. Basically,
you construct a fake control for each treated unit out of linear combinations
of control units to maximize the similarity between control and treated units.
You can do that in a way that closely or even exactly matches the pre-
treatment trend of the treatment and control groups.


Question:
What are the consequences of a single global currency on trade?

Sorry for the general nature of the question but I find it difficult to wrap my head around the idea of a global currency.

Let's say there existed a single global currency which was not controlled by a centralized entity. All countries use this currency as their national currency. Let's also assume there exists some mechanism by which countries can come to a consensus about changes to the global monetary system (money supply, interest rates, etc).

My question is, is there a way to achieve price stability in such a system? Would trade get in the way of the ability to achieve price stability, since the price of goods/services is different in each country?

Excuse me if I am getting major concepts wrong. I am new to economics but extremely interested in this problem.

Explanation: This is related to optimum currency area. We need to check how it is modeled, its applications and some discussions.

$\begingroup$

To be honest, I do not see the connection of the title with the question body
because you ask about inflation, rather than the impact on trade (you mention
trade, but in the context of price stability).

Paul Krugman's [ The Return of Depression Economics and the Crisis of 2008
](https://rads.stackoverflow.com/amzn/click/com/B004EJZE3G) has, in my
opinion, the best layman's explanation for the impacts of a single currency. I
highly recommend this book if you are extremely interested in this problem (or
(monetary) economics in general).

Krugman explains this with a fictional currency called globo. A quick summary:

  * Businessmen in particular like this system because they could buy and sell anywhere with a minimum of hassle
  * Careful management of the currency could prevent a boom-bust cycle for the world as a whole, but not for each country (also applies to regions within countries, but usually to a lesser extent because of the same language, free movement of labour etc).

The other article I recommend reading is [ optimum currency area
](https://en.wikipedia.org/wiki/Optimum_currency_area) . Since shocks would be
very different in different countries (some may grow, others shrink), prices
and wages and /or factor (labor) mobility must be very flexible for a country
to regain competitiveness. A country (region) can either decrease prices
relative to other countries, or workers leave the country where the
unemployment rate is high to take jobs elsewhere. That way, the unemployment
rate in that country decreases back to normal. In summery, even under a fixed
exchange rate, countries can adjust their real exchange rate in the medium run
but these adjustments may take longer and be more painful compared to flexible
exchange rates with independent monetary policy.

Either way, I am not sure how you define price stability? If you mean low
inflation, that is rather unrelated to trade but mainly a subject of economic
activity relative to money in circulation.


Question:
Who insures the FDIC in case it fails?

I understand that the Federal Deposit Insurance Corporation (FDIC) failing is unlikely, but the probability of such a failure is still positive. In case the FDIC fails, who covers the customers' losses? Will the Federal Reserve surely step in to print money to cover FDIC's ass?

Explanation: We first need to understand what is FDIC and its relationship to the government.

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FDIC is government institution, so it can only fail if [ government itself
lacks the funds ](https://www.fdic.gov/resources/deposit-
insurance/faq/index.html) .

Fed (unlike other central banks) does not have power to print new money. If
the government would like to print more money it will be done by the [ Bureau
of Engraving & Printing ](https://www.bep.gov/) that is officially part of the
Treasury. Fed could help by creating more money digitally by buying government
bonds, which also creates new money but it can't literally print them.

In case government runs out of funds, Fed could create more money by buying up
US bonds or Treasury could order BEP to print more money. However, even though
government does not need to ever default on nominal obligations, [
historically ](https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises)
governments often choose to (at least partially) default to avoid negative
consequences of excess money creation.

Hence, what would happen is that either government would raise more money
through monetary financing to avoid default, or government would decide that
it is not worth the consequences of monetary financing and will just default
on its FDIC obligations.


Question:
What is the refutation of this article about the FED being privately owned

What is the refutation of this article about the FED being privately owned

I find this article and I would like to know what is the refutation.

Please proper academic arguments.

Explanation: The central question is to ask whether Fed is private or public.

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There is no refutation of the claim.

Fed is a privately owned despite it being a government institution.

Fed clearly states this on its own [ website ](https://www.stlouisfed.org/in-
plain-english/who-owns-the-federal-reserve-banks) :

> The Federal Reserve Banks are not a part of the federal government, but they
> exist because of an act of Congress. Their purpose is to serve the public.
> So is the Fed private or public?

> The answer is both. While the Board of Governors is an independent
> government agency, the Federal Reserve Banks are set up like private
> corporations. Member banks hold stock in the Federal Reserve Banks and earn
> dividends. Holding this stock does not carry with it the control and
> financial interest given to holders of common stock in for-profit
> organizations. The stock may not be sold or pledged as collateral for loans.
> Member banks also elect six of the nine members of each Bank's board of
> directors.

However, note despite of private ownership:

  * the Chairman of Fed is publicly selected by president.

  * private banks are actually forced to own Fed, and have no say in how Fed is being run, and the return on the capital they are forced to invest in Fed is also not really lucrative.


Question:
New financing instruments as covert leverage?

Back when the Federal Reserve intervened in the commercial paper market in the 1970s, corporates essentially woke up the next morning and found they had two back-stopped modes of financing: their own paper and bank loans. It seems like it would be possible for the (large) companies to issue their own paper and then tap into their bank credit lines if they had trouble rolling the paper over for whatever reason. In effect, banks then, would be on the hook in that scenario. We could call this a covert liability, as it technically would not appear on the bank's balance sheet.

Question
Would this be a fair characterization of how money market instruments interact with each other and on aggregate change the supply of money, seemingly circumventing the powers of the Federal Reserve (in terms of capital adequacy and all that alphabet soup around tier 1 capital)? If so, has anything changed since then?

Explanation: We need to check current Line of Credit products and see whether the situation persists.

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Things have changed- Basel III requires capital to be held against committed
but undrawn lines of credit [ https://support.precisionlender.com/hc/en-
us/articles/115009834408-Regulatory-Capital-Requirements-for-Line-of-Credit-
Products ](https://support.precisionlender.com/hc/en-
us/articles/115009834408-Regulatory-Capital-Requirements-for-Line-of-Credit-
Products)


Question:
What is the name for the term/principle that trade causes a net increase in utility

Pretend that I grow and sell apples and that you are a hungry person. At that point of time, having an apple is more useful to you than having money. Because you are hungry and can’t eat money. However, to me having money would be more useful to me because I have more apples than I could ever use myself. After you buy the apple from me we are both better off.

This seems to be to be a basic economic principle but because I can describe the idea but don't have its name I don't know what to search for to read up more about that idea.

Explanation: This is related to Gains from trade where economic agents benefit from trading with each other.

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The term [ "gains from trade"
](https://en.wikipedia.org/wiki/Gains_from_trade) is most commonly used for
this.


Question:
What were the benefits of creating ON RRP (versus expanding the availability of IOR)?

I'm not understanding why the Fed decided to introduce their Overnight Reverse Repo Facility (ON RRP).

From the St. Louis Fed, it helps to provide a floor for the Federal Funds Rate (FFR), a market-determined rate at which banks lend to one another.

Not every financial institution that operates in the federal funds market has access to interest on reserves. So, the FFR could fall below the setting of the Interest of Reserves (IOR) rate.

To aid in the control of the level of the FFR, the Fed introduced the overnight reverse repurchase agreement (ON RRP) facility to a broad set of financial institutions.

Another option seems to be simple, giving more institutions accounts at fed banks, allowing them to also get IOR. Or even allow them accounts, but do not give them the same interest as depository institutions.

Further, ON RRP is no longer cash, so there must be use for the Fed to be ridding themselves of Treasuries overnight, but it's not clear why.

Explanation: This is related to the fact that some banks are member banks while others are non-member banks.

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Some banks are "non-member banks". A non-member bank is not subject to the
requirements of a member bank of the Federal Reserve system.

[ Here is a link to a reference from the Journal of Finance, June 1975.
](https://www.jstor.org/stable/2326853)

It says reserve requirements for nonmember banks are less onerous and
reporting requirements for nonmember banks in most states are "less
restrictive".