Posts Tagged: United Kingdom


1
Dec 08

Agent Based Computational Economics comes of age

L to R with 12 inch ruler at bottom: 1:64 Matc...

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Fifty years ago, Lawrence Klein began building complex econometric models of the US and UK economies. The vogue which his large scale models began eventually petered out following the Lucas critique. Today, a large scale agent-based computational economics model capable of simulating three types of agents with learning capabilities has been released. The model is massively parallel, and can simulate different types of agents, for example, households (up to $10^{7}$ ), firms (up to ∼ 10^{5}, producing consumption goods, and up to $10^{2}$ producing investment goods), and banks ( $10^{2}$).

I’ve been critical of ACE models in the past, but I’ve built a few (here, and here), read a fair amount of the literature, and I’m very interested in what might happen when we let a large scale computational model like this loose.


15
Aug 08

Prof. Kelly (or: Dr Faustus) on the House Price Decline

Plot of S&P Composite Real Price-Earnings Rati...

The time in which I write … has a horribly swollen belly, it carries in its womb a national catastrophe …

This opinion piece in today’s Irish Times is the worst kind of economic scaremongering from Prof. Morgan Kelly. He sets up his stall around potential bank collapses in the autumn, and builders’ all-or-nothing loan foreclosures causing a slash in house prices, which causes a further fall in house prices, and so forth, via social and economic contagion. Which is something he knows a lot about. In the strongest words possible, the professor tells potential buyers and sellers to hold off. Don’t enter the market, because it will fall further. If most people took his advice, that’s exactly what would happen. If people didn’t take his advice, the market wouldn’t fall as far. People wouldn’t see the value of their homes fall by as much, and the market could correct itself more slowly. I’m in agreement that housing is overvalued, but I don’t agree we need a crash to correct prices.

The professor is making the implicit assumption that people are buying to re-sell quickly. If people see a house, and buy to hold, and live in it for a few years, the market will eventually recover, and people will realise the value of their investments, if they hold it long enough.  Recent research by the Boston Fed on the US market shows that the influence of negative equity on foreclosures is increasing, but they note the sample they were looking at was mostly people buying to resell.

Reading Prof. Kelly’s article, you’d be forgiven for thinking the end of days is coming:

We are facing a decade of recession, of the sort Germany is just emerging from, as our incomes are brought back into line with our productivity.

With prolonged recession, emigration will resume, further reducing housing demand. In fact, as Brendan Walsh has pointed out, the collapse in the birth rate during the 1980s means that, even with zero net emigration, the prime housebuying population of 20 to 40-year-olds will fall by 10 per cent in the next decade.

Those who bought with negative equity in the mid to late 1980′s in the UK were able to sell at a profit five years later.

Being an expert on contagion, Prof. Kelly knows—how can he not—that if people read this article, and it feeds into their decision not to buy or sell, the collapse of banks who hold lots of builders’ loans (and who, in Prof. Kelly’s estimation, won’t see a penny when the builders default) is assured. The market shudders because people decide the world is one way, and not another. It is a crisis of expectations, not of fundamentals. Because the housing market is not driven by fundamentals, and never has been. Anywhere. Ever, as Robert Shiller noted recently.

Normally I’m conscious of staying out of the housing debate, because it’s not a good place to be ranting. I’ll do my ranting somewhere else. But this article by Prof. Kelly jumps the shark for housing doom and gloom amongst Irish economists.

I’ll finish this piece with a quote from Mann’s Dr. Faustus, whom Prof. Kelly must have been channelling when writing this article. Mann is writing about a post World War Two Germany:

The time in which I write … has a horribly swollen belly, it carries in its womb a national catastrophe … Even an ignominious issue remains something other and more normal than the judgment that now hangs over us, such as once fell on Sodom and Gomorrah … That it approaches, that it long since became inevitable: of that I cannot believe anybody still cherishes the smallest doubt. … That it remains shrouded in silence is uncanny enough. It is already uncanny when among a great host of the blind some few who have the use of their eyes must live with sealed lips. But it becomes sheer horror, so it seems to me, when everybody knows and everybody is bound to silence, while we read the truth from each other in eyes that stare or else shun a meeting.

…[C]lung round by demons, a hand over one eye, with the other staring into horrors, down she flings from despair to despair. When will she reach the bottom of the abyss? When, out of uttermost hopelessness — a miracle beyond the power of belief — will the light of hope dawn? A lonely man folds his hands and speaks: “God be merciful to thy poor soul, my friend, my Fatherland!”

– Thomas Mann, Dr. Faustus (1947, written in 1945)

[excerpts from chapter 33, and the epilogue]


14
Aug 08

Thinking about Climate Change in Ireland

One global climate model's reconstruction of t...

A barrage of emails has me thinking about climate change in Ireland, what we can expect, and more importantly, what we might do about it right now. And I’m not thinking about recycling. I’m thinking about policy responses centered around forward planning, a sort of flanking move on the most likely effects of climate change.

What’s most likely to happen to us?

Ireland’s Scale

First, It’s important to note that one of the key numbers here is 2 degrees. A 2 degree increase in mean monthly temperatures, with a carbon measurement of between 500-550 parts per million, is about the median estimate of what we’ll see happening to the Irish climate. Right now we’re looking at 400 parts per million in the Irish atmosphere, most of the time. Another important number is 5 degrees increase over the next 100 years. It’s game over time if that happens, we’re talking global catastrophe.

ICARUS issued a report on the likely effects of climate change in Ireland, and here’s what they had to say:

  • Current mean January figures are predicted to increase by 1.5oC mid century with a further increase of 0.5oC-1.0oC by 2075.
  • By 2055, the extreme south and south west coasts may have a mean January temperature of 7.5-8.0oC. By then, winters in Northern Ireland and in the north Midlands will be similar to those presently experienced along the south coast.
  • Since temperature is a primary meteorological parameter, secondary parameters such as frost frequency and growing season length and efficiency can be expected to undergo considerable changes over this time interval.
  • July temperatures will increase by 2.5oC by 2055 and a further increase of 1.0oC by 2075 can be expected. Maximum July temperatures in the order of 22.5oC will prevail generally with areas in the central Midlands experiencing maximum July temperatures of 24.5oC.
  • Marked decreases in rainfall during the summer and early autumn months across eastern and central Ireland are predicted. Nationally, these are of the order of 25% with decreases of over 40% in some parts of the south-east.
  • Overall increases in precipitation are predicted for the winter months of December- February. On average these amount to 11%. The greatest increases are suggested for the north west where increases of approximately 20% are suggested by mid century. Little change is suggested as occurring on the east coast and in the eastern part of the Central Plain.

McGrath et al [pages 22--29] from the EPA had this to say:

Based on a stripped down version of a German climate simulation model, the ECHAM4 model. They found:

  1. Mean monthly temperatures will increase from 2021-2060 by 1.25-1.5 degrees;
  2. There will be changes in weather patterns, most likely more rain in winter and less in June and July;
  3. Patterns will change most markedly in the South East and East.

It’s important to note that one of the key numbers here is 2 degrees increase in mean monthly temperatures, with a carbon measurement of between 500-550 parts per million. Right now we’re looking at 400 parts per million in the Irish atmosphere, most of the time.

Local Scale

Change.ie has a great infographic showing the effects on local communities of climate change. Limerick, for instance, can expect increased flooding more of the year round. Awesome.

Economic Effects

Page 3 of Chapter 4 of the OECD‘s April 2008 report (.pdf) projects a 2.8–4 degree increase over the next 100 years. The report also cites Stern’s 2008 report of Global warming costing up to 10% of world GDP over the next 50 years. If we experienced that in Ireland in 2020, it would bring us back to 2001 levels of  wealth. Basically a generation’s work lost, just because of climate change’s direct effects.

I’ll post more on this when I get time, but it’s a very interesting area to think about. So I will.

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