# B. Oakley, A Mind for Numbers: How to Excel at Math and Science

B. Oakley’s  “A Mind for Numbers” [ru, en] is one of those books which make you feel embarassed to admit purchasing and worse still reading them. I’m coming clean now admitting that I’ve done both.

One extenuating circumstance would be that I’ve been again in a rush an in need of an airplane companion. Another is that I saw Oakley’s class at the Coursera  and thought that a book might be its useful substitute.

I won’t write much because there isn’t much to write about.

Book’s content is neither related to math, nor sciencce despite the title.

It is another one of the hoards of self help books. Its message is also simple and does not require the 200+ pages the author devotes to it (spoilers): if you want to learn something than a) do your homework, b) exercise consistently as you are not going to acquire persistent k owledge in a learning blitz, c) may be use a pomodoro technique.

The bottom line is that the book is worth neither time, nor money it costs.

# Pizano, D.: Conversations with Great Economists

Overexcited Colombian and the 20th century Greats talk past each other.

So the other day I was preparing for a short flight and sadly this is the time when your choice of book companion is influenced by its size. On this front the tiny tome of “Conversations…” has a certain competitive edge.

The genre of “economist interviews another economist” is well established and I’ve encountered few cabinets lacking “Inside the Economist’s Mind“.  So I looked forward for hopefully more of the same: light talk on the issues of the day with occasional comment on the ongoing theoretical debates.

What I found out that this book is something quite different.

On the surface of it, the book indeed contains interviews with seven top 20th century economists. However, the style of these interviews is peculiar. The root cause of this peculiarity is the author.

Diego Pizano as he introduces himself is a son of the co-founder of the Universidad de los Andes Fransisco Pizano while in the interviews he mentions that he works on “the possibility of making the dynamic input-output tables for Colombia”. However, as it soon transpires his true passion is different.

His main goal is to make it as clear as possible that he “believes that one ought to distinguish between ideological and epistemological propositions”. The interviews more or less are centered on this statement to which his interviewees typically respond as did Leonid Kantorovich: “I cannot get into detailed analysis of all the ideas you have presented and thus I prefer to state my own position”.

The author also makes quite a few statements like this: “I do not know if Keynes followed the debates connected with the differences that can be established between Die Natur und Kultur oder Geistwissenschaften. But it is paradoxical that he ended up closer to Shakespeare, Nietzsche and Kierkegaard than to Descartes and Mill” to which he gets a reserved reply such as Joan Robinson’s “The line of research you have presented is interesting and I am of the opinion it could be fruitful and illuminating to continue to analyze those aspects of Keynes’s work”.

My impression is that most of the notable comments in the book are made despite the efforts of the author, not because of the them.

Overall, would not recommend this book, it will only suit the most devoted followers of any of the seven Greats who would like to tolerate author’s interviewing techniques.

# A.J.P. Taylor: The Course of German History

It is actually disturbing how little German history I knew before taking up AJP Taylor’s “Course..”.  I hope this might be a fairly common ‘home bias’ in historical awareness, i.e. tending to know history of other countries in as much as it does overlap with the history of your own in some generally tragic manner.

Before opening the book it is worth spending just a bit of time looking up the author, an ‘An Unusual Kind of Star‘ of the British TV and the ‘only really anti-German British historian‘. It would help the reader to prepare for a sharp take off in the first chapters.

The book itself is a very opinionated narrative of the German history covering the period from early XIX to mid XX.  There are certain interesting details about European economic history, for example the Zollverein customs union, but what I liked most were the following two more general ideas:

• Ambitious foreign policy tends to come at price of less liberal policies at home (p.185): “[…] it served only to underline the contradiction of German wishes: the great majority of Germans wanted a Germany overwhelmingly strong, asserting by means of this strength her claim to ‘a place in the sun’, and basing her security on Power, not agreement with her neighbors; at the same time they wanted a constitutional system inside Germany and resented the arrogance and predominance of the military caste. few Germans felt the absurdity of desiring to dominate all Europe and yet to escape domination themselves […].”
• Stable distribution of rights and political powers tends to be a result of the reluctant compromise, it cannot be bestowed from above or imported: (p.146): “If social security had been won by political struggle, it would have strengthened the confidence of the working-class movement to make political claims; as it was, the workers seemed to have received social security as the price of political subservience, and the drew the moral that grater subservience would earn a year greater reward”.

Some more quotes:

On German liberals in 1792-1814 (p.25): The German liberals had no agrarian program and no sympathy with the property-less masses, whom they despised as obscurantist and reactionary; nor had they any feeling that liberal institutions needed to be fought for and defended – they expected them to be bestowed from above.

On 1848 revolution (p.36): In other countries the revolution gave the people universal suffrage; in Prussia it gave them universal military service.

…and some more on 1848 (p.69): German history reached its turning-point and failed to turn. This was the faithful essence of 1848.

…and yet more (p.71): The revolution of March 13th in Vienna and the revolution of March 18th in Berlin, which together cleared the way for the German revolution, were both glorified unemployed riots.

On the decline of parliament (p.120): The abdication of the Prussian liberals and the defeat of parliamentary government had a profound social result. Parliament did not control the state; therefore it could never be for the individual the path to power. Henceforth only man of the second rank went from the middle classes into politics. The intellectual ability of the politicians steadily, relentlessly, declined; all that survived was the gift of sterile negative criticism. Political parties became inevitably interest groups, solely concerned to win concessions from the state, but never supposing that they might have to accept responsibility. The really able and ambitious members of the middle class shunned politics and turned exclusively to industry and finance.

On creative destruction (p.139): The financial crash of 1873 was a normal event of the age of capitalism […]. In England when the speculative bubble burst, those who had blown it took the consequences […]. But the German industrialists had not the long tradition of self-help which made British capitalists fend for themselves until long into the twentieth century. Besides, they had made an implicit bargain with Bismarck: they had renounced political power in return for economic wealth, and now they expected Bismarck to keep his bargain.

# C.Clark: Sleepwalkers. How Europe went to war in 1914

I have reservations about an extent to which studying history is ‘useful’ from the applied perspective. Historical method, in my view, has limited potential to identify more or less general and reliable regularities in the social mechanics from the economic policy point of view.

Thus the criteria on which books, such as Clark’s Sleepwalkers, should be judged are literary and entertainment value. Anyway judging it more rigorously is well beyond my expertise.  Instead of providing a review of the book (which was done by many more qualified individuals) I’ll just share three ideas that I pondered when reading the book:

• Civil/military divide within the government. Clark provides an overview of the military-civil conflicts within the governments of the Entente and the Triple Alliance. The story is the same across Austro-Hungarian Empire, Russia, France and UK: the defense minister is lobbying for higher tax revenue to be allocated for modernization of the military while the finance minister more or less vigorously opposes military spending build up. The conflict lost none of its topicality in one hundred years it seems. There’re some interesting details on the Russian situation with the clash between the P.Stolypin successor PM&Finance Minister Kokovtsov and Defense Minister Sukhomlinov. Clark quotes Nicolas II telling Kokovtsov (p.218): “In your conflicts with Sukhomlinov you are always right. But I want you to understand my attitude: I have been supporting Sukhomlinov not because I have no confidence in  you, but because I cannot refuse to agree to military appropriations”.
• Monarchy. The idea itself is quite original: let’s employ the same techniques that we use to improve domesticated animals to selection of country leaders. Why would anyone accept it as normal? The power of status quo, I suppose. However, what Clark argues is that at the operational level the monarchs’ discretion has been materially limited by late XIX century. As far as I understood, the web of blood relationships between the monarchs of Europe served as an alternative less formal diplomatic communication channel, however the messages that have  been transmitted were formulated or at least heavily influenced by professional bureaucracy. The same goes for internal affairs. The telling quote is on p.184: “Nicholas II could favor this or that faction or minister and thereby undermine the cohesion of the government, but was unable to set the agenda, especially after the fiasco of the Russo-Japanese War”.
• Ideological homophily. What the book illustrates is how persistent are personal opinions. For the likes of Franz Conrad von Hötzendorf no amount of evidence could challenge the necessity of aggressive action against Serbia. What’s worse is the ability of such individuals to strategically influence the composition of their own ministries and the government in favor of others who share their vision or avoid challenging it. The result seems to narrow the ‘field of vision’ and the set of alternative courses of action.

Overall the book is highly recommended reading. Probably the last time I’ve enjoyed the book so completely was ‘Farewell to Russia’ by A.Levandovsky (thanks to VG for this).

Otherwise, just a handful of quotes:

• On international finance, p.30: ” […] fragile debtors like Serbia […] could secure loans on reasonable terms only if they agreed to concession of fiscal control that amounted to the partial hypothecation of sovereign state functions. For this reason among others, international loans were a political issue of the highest importance, inextricably wound up with diplomacy and power politics.”
• On investor relations, p.231: “Early in 1905, the Russian were distribution GDP8ooo a month to Parisian press, in the hope of stimulating public support for a massive French loan. “
• On fiscal priorities, p.32: “In 1905, pressed to ratify a new revenue source, the peasant dominated assembly of Skupstina chose to tax school books rather than home distillation. The result was a strikingly low rate of literacy, ranging from 27% in the northern districts of the kingdom to only 12% in the south-east”
• On the choice of the assassination target, p.49: “[…] the archduke was not targeted on account of any alleged hostility to the Slavic minorities in the Austro-Hangarian Empire, but, on the contrary, because, to borrow the words of his assassin, Gavrilo Pricip, ‘as future Sovereign he would have prevented our union by carrying through certain reforms’. […] The targeting of the archduke thus exemplified one abiding strand in the logic of terrorist movements, namely that reformers and moderates are more to be feared than outright enemies and hardliners.”
• On the use of press by officials, p.195: “From behind the scenes key officials lime maniacally Germanophobe Maurice Herbett […] used his extensive newspaper contacts to sabotage negotiations by leaking potentially controversial conciliatory proposals to the French press before the had been seen by the Germans. […]”

Short resume of the book  by the author:

# Economica at GitHub

Today I’ve posted my Economica package at GitHub here.

It is fully functional allowing the user to run ARIMA-X13 with various options, estimate VARs and identify SVARs, construct some plot types that are not readily available in standard Mathematica distribution.

Hopefully I will be adding tutorial on its variuos functions soon.

By the way, it has also been added on packagedata – Mathematica package aggregator.

# Система Кудрина: Рано для биографии

Некоторое время назад закончил “Систему..” и делюсь впечатлением от своей первой книжной покупки на google play.
Анонс сулит золотые горы: “это история российской власти и российской экономики, рассказанная от лица тех людей, кто ее создавал”, в то время как рецензенты больше говорят о Кудрине, чем о книге. Это справедливо, поскольку книга не подходит близко к исполнению данных обязательств, а под рассказами “творцов истории” понимается 2-4-х страничное интервью Кудрина равномерно размазанное по книге, комментарием к которому последняя по сути является.
Самым похожим на подобие содержательного обсуждения экономических решений является полукарикатурный эпизод с разговором между Кудриным и руководителем одного из департаментов Минфина, в котором подчиненная докладывает министру о работе, которую провели ее сотрудники по запросу министра сделать “глубокий кризисный прогноз”, и сообщает буквально следующее:.
“- Многие кризисы наложили друг на друга и посмотрели, как менялись деловые индексы за год или полгода до кризиса. Так вот: по всем индикаторам получается, что осенью будет крупный кризис. А может, даже не осенью. […]”

Кое-что действительно становится известным. Скажем, что автором идеи с Олимпиадой в Сочи является Собчак, который  предположительно привез эту идею из отпуска в 1994 г.,  однако не смог получить финансирование в то время, или то, что мечтой Кудрина являет инфляция в 3%. На мой вкус, этого явно недостаточно для книги такого размера.
Думаю, дело здесь в том, как верно подметил Сонин во вступлении, что говорить о завершении карьеры Кудрина еще слишком рано, а значит время не пришло и для написания сколько-нибудь откровенной и глубокой биографии.

# CBR’s inflation expectations estimates: introduction (1/2)

Inflation expectations at some point have become the corner stone of CBR’s monetary policy. Changes in their level are cited in each and every monetary policy press release. The most recent reference is as follows:

“… In addition, inflation expectations of households escalated in November, although projected to decrease.”

In order to identify these expectations CBR regularly orders “Public opinion” fund to conduct countrywide surveys. These surveys ask a variety of question on topics ranging from preferred savings vehicles to consumer confidence. Additionally two types of questions on inflation expectations are asked:

2. multiple-choice question on prices 12mo ahead.

By averaging (or taking a median of) responses to the type 1 question one can obtain a so called direct estimate of inflation expectations. Its ease of calculation has a certain downside attached. Direct estimate has a known upside bias possibly explained by availability hypothesis, i.e. respondents reporting more recently observed or sizable price growth as inflation expectations (these are almost invariably related to food inflation), while less impressive price trends (i.e. stagnating rent) are left unacknowledged. Current CBR’s direct report provides a median of the numerical responses of 15.0% YoY and it has rarely been under 11.0% since 2010.

An alternative method helps partly alleviate the problem by simplifying the problem for the surveyed and asking them where relatively to current inflation would future trends lay.  This method is called probabilistic estimate and relies on responses to type 2 question.

Because it will be the focus of what follows let me cite the text of the question here:

“Do you believe prices in the next 12 months will:

• will be growing faster than now
• will be growing at the same pace as now
• will be growing at the same pace as now
• will not change
• will decrease”

Results are presented in the report (Russian only) as a chart:

Source: CBR.

So with a short introduction to why we do this and where the data come from let’s proceed with identification methodology.

Methodology [1]

In order to recover expected inflation with probabilistic method we should make two additional assumptions:

• family of the probability distributions of inflation expectations;
• the reference inflation rate to which the surveyed do benchmark their expectations, i.e. “inflation now”.

Next we assume that when answering questions people do have some confidence intervals, i.e. regions within which inflation is assumed to be qualitatively equal. That is if I think that inflation might be -0.5 – 0.5% in the next 12mo I would likely choose “prices will remain constant” option.

Fist let’s denote the shares of the answers as follows:

• is the share of surveyed reporting inflation will accelerate;
• is the share of surveyed reporting inflation to remain stable;
• is the share of surveyed reporting inflation to decelerate;
• is the share of surveyed reporting inflation to be zero;
• is the share of surveyed reporting inflation to be negative;
• is the share of the surveyed that had failed to respond.

Next we will get rid of those who find it too difficult forming 12mo ahead inflation expectations, making sure the remaining shares do sum to unity:

for

Graphically the whole picture might look as follows if we assume normal distribution:

At this point we might write the following system of equations :

where $\theta[/latex] is a vector of two parameters of the distribution of inflation expectations, and are sensitivities. This system has four unknowns: ,$l[/latex], 2 for $\theta[/latex] which makes the last equation redundant. The last step would be to solve the system for parameters of the and calculate the expected value implied by the estimated distribution. Example: Verify November estimates We now can try and verify CBR reported estimates of inflation expectations for the Nov-15 wave of the survey, which put it at 15.0%. As the chart above from this report shows: • is .19; • is .52; • is 15 • is .0; • is .0; • is .15. Because of the rounding effects these numbers do sum up to 1.01, so I divide them through by . After that we can get rid of the ‘do not know’ answers dividing through by$(1-\beta_6)[/latex], so we have:

• is .22;
• is .60;
• is .17
• is .0;
• is .0;

For simplicity we make the uniform probability distribution assumption:

Now we can solve the whole thing numerically. I use Mathematica, which is matter of personal preference, but a suitable routine can be developed even in Excel. I assume which is the YoY inflation rate during the week when the report has been published

[wlcode]

beta={0.19,0.52,0.15,0,0,.15};

beta=beta/Total[beta];

alpha=Most[beta]/(1-Last[beta])

π0=14.8;

pd=UniformDistribution[{a,b}];

sol=FindRoot[

{alpha[[1]]==1-CDF[pd,π0+s],

alpha[[2]]==CDF[pd,π0+s]-CDF[pd,π0-s],

alpha[[3]]==CDF[pd,π0-s]-CDF[pd,l],

alpha[[4]]==CDF[pd,l]-CDF[pd,-l]

},

{{s,0.1},{l,1.0},{a,10},{b,20}}]

[/wlcode]

The result is {s -> 3.00759, l -> 1., a -> 10.0573, b -> 20.0054}. Expected value of the uniform distribution is , so our estimate of inflation expectations is 15.0 exactly in line with the CBR.

Alternative, we can use Mathematica to calculate expected value of the distribution: [wlcode]Expectation[x, x \[Distributed] pd /. sol][/wlcode].

The results might vary due to the difference in the choice of the so full transparency would require the CBR reporting its choice of the ‘current inflation rate’ or the in the inflation expectation reports.

***

In the next post, we are going to decompose changes in inflation expectations into the change in the survey results and change in the .

1. We discuss a simplified methodology. Actual one is outlined in Khazanov, Alexey (2015),  Inflation expectations quantification by the Bank of Russia (pdf), Money and credit
2. CBR (2014), Guide to inflation expectations (pdf)

# Afanasyev et. al: Budget and the fiscal system

Coming from a monetary policy background I still find it buffing how much more complex is fiscal policy. There’s a substantial number of levers that central bank can use. Still you might call the key rate The Instrument.
When it comes to fiscal policy volume of revenue and spending, their structure and a universe of related issues come into play so that bottom line deficit/surplus alone is far from being an indicator of fiscal policy stance. This not even looking at issues of budget federalism or politics of the budget process.
I gather, this complexity of the topic does not lend it to clear exposition.
The result is, there’s still no decent book on fiscal policy in Russia. I went through a couple of textbooks which were not substantial enough to mention here, before deciding to give a closer look at ‘Budget and fiscal system’  by Mstislav Afanasyev.
The book had a promising feature of being authorised by Alexey Kudrin who was behind many of the current features of the fiscal system including the Reserve fund and NWF, medium term budget planning, fiscal rule etc.
Having spent a fair amount of time with this book I’ve come to the conclusion that it might be one of the better books on fiscal policy in Russia. But this resulted not because of high quality of the text but because the bar is set at quite a low level.
Some of its more visible shortcomings below.
Extensive quotes from the Budget code, weak on economics
The book is basically an introduction into the fiscal law, but it does lack any analysis of the fiscal system from the economics view point. Even such basics as cross country comparative tax burden analysis, efficiency of spending, tax collection efficiency are avoided.
Weak on case studies, examples
The text is close to sterile when it comes to the intersection of law and its application. There’re exactly zero information on problems of fiscal federalism, fiscal discipline on regional and municipal levels and politics seem to be absent from the budget process.

The text needs editing: extensive repetitions

The text is written in the this variety of language which you might expect to find in legal papers, but which seems much less appropriate for the textbook. Many paragraphs are word by word repetition of text in the preceding paragraph with the difference being that the same idea applies for example to two levels of the budget system. I think a more thorough editing would allow to cut up to a forth of the text.

The rediculous pie 3d charts
The 3D pie charts (authors favorite type of chart) occupy up to half of the page to show the relationship between two numbers.
Stub chapters: sovereign external lending
The chapter on external lending of the country is basically a plan to write a chapter. In the chapter explicitly devoted to external debt there’s no single example of external lending of any country, not to say discussion of the terms or a purpose of such a loan.
The philosophical chapter fetish
For some reason the book devotes a whole complete chapter on the philosophy of the fiscal system which goes as far as discussing the nature of the state. It tries to cover everything from Thomas Aquinas to Mikhail Bakunin. The reason for this escapes me.

My personal preference would be for more detailed presentation of the core material.

All in all, it is hard to recommend this  this book. Text obviously needs work: more cases, examples, less repetitions etc.

To add a constructive touch, here’s a list of sources on fiscal issues which are highly readable: i) Economic Expert Group’s publications, ii) NIFI’s Financial journal is a good source but I usually only look at the articles authored by NIFI’s own researchers and skip everything else.

# seminar

https://www.quandl.com/data/YAHOO/INDEX_SPY-SPDR-S-P-500-SPY

https://www.dropbox.com/s/5zc9ay0ljoncutl/yahoo-index_spy.xlsx?dl=0

# HSE Seminar: Signal and structural models at the service of monetary policy

Back a good couple of years ago when I was working on my diploma on monetary policy I stumbled upon an interesting paper by the CBR’s economists. It was about some model they’ve used for macro forecasting. The thing that struck me was that it seemed to be only published nowhere expect for some conference proceedings on the site of the National Bank of Belarus. That is not exactly where you would expect to see it. No Russian journals, nor presentations.

Now time to make up for it. One of the coauthors and my current colleague Alexander Borodin presents the CBR’s model at HSE banking seminar ‘Empirical methods in banking sector analysis‘.

Here’s Alex’s presentation:

I’ve also presented my article that was published in Russian ‘Applied econometrics’