Holiday Haze

Your dedicated blogger is about to vanish in the holiday haze, returning early in the new year. Meanwhile, all best wishes for the holidays.  If you're at ASSA Chicago, I hope you'll come to the Penn Economics party, Sat. Jan. 7, 6:00-8:00, Sheraton Grand Chicago, Mayfair Room.  Thanks so much for your past, present and future support.



[Photo credit:  Public domain, by Marcus Quigmire, from Florida, USA (Happy Holidays  Uploaded by Princess Mérida) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons]

Varieties of RCT Extensibility

Even internally-valid RCT's have issues. They reveal the treatment effect only for the precise experiment performed and situation studied. Consider, for example, a study of the effects of fertilizer on crop yield, done for region X during a heat wave. Even if internally valid, the estimated treatment effect is that of fertilizer on crop yield in region X during a heat wave. The results do not necessarily generalize -- and in this example surely do not generalize -- to times of ``normal" weather, even in region X. And of course, for a variety of reasons, they may not generalize to regions other than X, even in heat waves.

Note the interesting time-series dimension to the failure of external validity (extensibility) in the example above. (The estimate is obtained during this year's heat wave, but next year may be "normal", or "cool". And this despite the lack of any true structural change. But of course there could be true structural change, which would only make matters worse.) This contrasts with the usual cross-sectional focus of extensibility discussions (e.g., we get effect e in region X, but what effect would we get in region Z?)

In essence, we'd like panel data, to account both for cross-section effects and time-series effects, but most RCT's unfortunately have only a single cross section.

Mark Rosenzweig and Chris Udry have a fascinating new paper, "Extenal Validity in a Stochastic World", that grapples with some of the time-series extensibility issues raised above.

Exogenous vs. Endogenous Volatility Dynamics

I always thought putting exogenous volatility dynamics in macro-model shocks was a cop-out.  Somehow it seemed more satisfying for volatility to be determined endogenously, in equilibrium.  Then I came around:  We allow for shocks with exogenous conditional-mean dynamics (e.g., AR(1)), so why shouldn't we allow for shocks with exogenous conditional-volatility dynamics?  Now I might shift back, at least in part, thanks to new work by Sydney Ludvigson, Sai Ma, and Serena Ng, "Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?", which attempts to sort things out. The October 2016 version is here.  It turns out that real (macro) volatility appears largely endogenous, whereas nominal (financial market) volatility appears largely exogenous.