I understand the Lucas critique, and the idea that individuals can change their behavior to improve their welfare given some policy change. But how would this relate to something like Brexit, where individuals delibrately undermined their economic welfare in a substantial and long-term manner. Another counter-example for the Lucas critique would be the US presidential elections where individuals believe the president can affect inflation even though he/she cannot. Is there a way to reconcile these Lucas critique ideas with empirical observation of widespread systematic deviation from economic self-interest? In other words, these are not random errors of judgement but instead persistent and self-reinforcing?
Thank you very much for your comment. I think it is one of the most important questions of our times to understand such behavior that seems to be irrational. Overall, I think there is more than one explanation and for different people, different explanations may apply. Three potential explanations (but there may well be many more) are the following. The first could be related to misinformation -- when people do not know the true consequences of their actions/votes or they are deliberately misinformed. E.g., one could promise millions of pounds saved daily through Brexit without being held accountable for that promise. A second possibility is the presence of an additional item in the utility function of many people that we do not consider with the simple economic models. This could be, for example, the pleasure of “punishing” the (political) elite. For many people, this pleasure may overcompensate for some of the negative economic consequences of their choices. The third possibility is that many people may just find (for whatever reason) something like less migration and less international integration so important that they are willing to forgo all the economic benefits thereof. So these are my 2 cents on that but I am sure that better explanations exist and could be given…
Thank you so much for your video! It really helps me a lot. I have a question at 13:00, the utility of the household. Why do we choose the utility functions ln(c) and ln(1-l) for consumption and leisure? Can we plug in other kinds of utility functions, like CRRA or CARA in the equation? And what's the effect of choosing different utility functions?
I am glad that the video is helpful! Yes, you can instead use, e.g., CRRA with ((c-1)^(1-sigma))/(1-sigma) and a similar form for 1-l. The logarithmic utility function is the special case of the CRRA utility function when sigma goes to 1. It is the simplest way of formulating the central tradeoffs because income and substitution effects exactly offset each other in the logarithmic case such that the FOCs simplify considerably. My advice would be to always start with the simple logarithmic formulation and then generalize after the simpler case is solved. Doing so allows you to trace back the sources of changes in the results to changes in the functional form of the utility specification.
Thank you! You are looking for the continuous-time DSGE model? In this case, the following document may be helpful. The authors set up and solve a continuous time New Keynesian model: www.oposch.com/Paper/WorkingPaper/fernandez-villaverde-posch-rubio-ramirez.pdf In addition, the following paper provides an introduction: www.nber.org/system/files/working_papers/w22343/w22343.pdf I hope this is useful.
Thank you very much for the positive feedback and the suggestion. In my lectures, I usually have exercise parts in which we do step-by-step derivations and applications of the models. I will think about how best to include something similar in the videos.
Very good presentation, thank you !
Thank you for your positive feedback!
I appreciate all the amazing resources from south korea
Thank you!
Very clear! Thank you Klaus, good job!
Thank you! I am glad you find it clear!
I understand the Lucas critique, and the idea that individuals can change their behavior to improve their welfare given some policy change. But how would this relate to something like Brexit, where individuals delibrately undermined their economic welfare in a substantial and long-term manner. Another counter-example for the Lucas critique would be the US presidential elections where individuals believe the president can affect inflation even though he/she cannot. Is there a way to reconcile these Lucas critique ideas with empirical observation of widespread systematic deviation from economic self-interest? In other words, these are not random errors of judgement but instead persistent and self-reinforcing?
Thank you very much for your comment. I think it is one of the most important questions of our times to understand such behavior that seems to be irrational. Overall, I think there is more than one explanation and for different people, different explanations may apply. Three potential explanations (but there may well be many more) are the following. The first could be related to misinformation -- when people do not know the true consequences of their actions/votes or they are deliberately misinformed. E.g., one could promise millions of pounds saved daily through Brexit without being held accountable for that promise. A second possibility is the presence of an additional item in the utility function of many people that we do not consider with the simple economic models. This could be, for example, the pleasure of “punishing” the (political) elite. For many people, this pleasure may overcompensate for some of the negative economic consequences of their choices. The third possibility is that many people may just find (for whatever reason) something like less migration and less international integration so important that they are willing to forgo all the economic benefits thereof. So these are my 2 cents on that but I am sure that better explanations exist and could be given…
Thank you so much for your amazing efforts!
where can I find your slides?
Thank you for watching and for your interest in the videos/slides. I could send the slides by email if you provide me with your contact details.
Thank you so much for your video! It really helps me a lot. I have a question at 13:00, the utility of the household. Why do we choose the utility functions ln(c) and ln(1-l) for consumption and leisure? Can we plug in other kinds of utility functions, like CRRA or CARA in the equation? And what's the effect of choosing different utility functions?
I am glad that the video is helpful!
Yes, you can instead use, e.g., CRRA with ((c-1)^(1-sigma))/(1-sigma) and a similar form for 1-l. The logarithmic utility function is the special case of the CRRA utility function when sigma goes to 1. It is the simplest way of formulating the central tradeoffs because income and substitution effects exactly offset each other in the logarithmic case such that the FOCs simplify considerably.
My advice would be to always start with the simple logarithmic formulation and then generalize after the simpler case is solved. Doing so allows you to trace back the sources of changes in the results to changes in the functional form of the utility specification.
OK, I get it now. Thank you so much!!!🥰@@KlausPrettner
Thaks sir
👍👍
Good job and Thanks a lot Sir! Please how to solve the derivative in the DSGE models when one used the cotinuum function?
Thank you!
You are looking for the continuous-time DSGE model? In this case, the following document may be helpful. The authors set up and solve a continuous time New Keynesian model:
www.oposch.com/Paper/WorkingPaper/fernandez-villaverde-posch-rubio-ramirez.pdf
In addition, the following paper provides an introduction:
www.nber.org/system/files/working_papers/w22343/w22343.pdf
I hope this is useful.
A great lecture gone through still I’m getting confused! Somewhere you should try to solve the the things while lecturing which could be more useful
Thank you very much for the positive feedback and the suggestion. In my lectures, I usually have exercise parts in which we do step-by-step derivations and applications of the models. I will think about how best to include something similar in the videos.
The last ten minutes are just to complex unfortunately. Autoregressive processes are a whole other module to learn before i can understand
Thank you for your feedback! Perhaps I will upload a video on AR processes at some point.
You stim a lot uhm? I do those mouth clicks quite often too, my psychiatrist explained that's a vocal stim. I guess you're an aspie too?
i think you are projecting, i don't hear much vocal stim from him...