COFFEE & BISCUITS

David Cass, Economics Professor at UPenn, passed away on April 15. I only first learned of this giant in modern economics last year, when I read the “Inside the Economist’s Mind” (edited by Samuelson), which devoted a chapter talking about how he came to sunspot theory with Karl Shell. Then, when I took Professor Star Wars’ class on growth, I wondered why the professor did not use the term “neoclassical growth model” and instead said “Cass model”. (Later I found out that Professor Star War’s de facto wife also uses the term “Cass model” to refer to neoclassical growth model). Because David Cass was the father of the neoclassical growth model, which all macro econ grad students are familiar with.

Then in Winter, from Prof. Connossieur’s class, I learned about sunspot equlibrium, which was also proposed by David Cass. He wrote a short and elegant paper with Karl Shell (forgot the title of the paper), showing how in a case of incomplete market (due to mortality or retriction on trades for younger people before they are born in over lapping generation model) there can exist a sunspot equilibrium that pareto dominates the nonmonetary nonsunspot competitive equilibrium.

Sunspots shocks are random shocks that have no relations with the fundamentals yet can get you a different equilibrium. The idea is that even though economic agents might have perfect foresight, they face an additional source of uncertainty when they have to take account of what other people will do. That source of uncertainty is precisely what affect the outcome. A good example of this idea is self-fulfilling crises in financial markets.

Here’s a quote from the paper,

The first work on sunspot equilibrium was reported in Shell (1977), which is based on our joint research efforts on the infinite-horizon, OLG economy. In this unpublished paper, it was assumed that there is no intrinsic uncertainty. The only randomness is in the level of sunspot activity, which has no effect on the economic fundamentals. We showed that there is an equilibrium in which rational individuals believe that the general price level is affected by the level of sunspot activity and that these beliefs are self justifying. It was assumed that the economy is “shocked” by sunspots in each period. In this first example of sunspot equilibrium, economic fluctuations are generated within the private sector, and the stabilizing (contrasunspot) fiscal policy muts be perpetually active. This is contrary to the notion that erratic behavior in rational expectations economies is solely the fault of the erratic behavior of the government.”

The sad thing is that when I went to Prof. Cass’ UPenn website, there is still a “contact” button linking to his email, dcass@upenn.edu. But where does one contact one who has left the earth already?

I guess this is the reason why all of a sudden I don’t have classes next week. Professors here leave for the funeral.