Thursday, October 4, 2007

Wile E. Coyote Moments

As I mentioned recently, Paul Krugman has expressed a concern that we may experience a "Wile E. Coyote Moment" in regards to the dollar and the current account deficit. At VoxEU, Richard Baldwin responds to Krugman. Setting aside the substantive issue, I am intrigued by the possibility that "Wile E. Coyote Moment" may be entering the lexicon of economic jargon. Here's Baldwin's explanation:
...the markets are due for what Krugman calls a 'Wile E. Coyote' moment – a reference to the Warner Brothers’ cartoon where a greedy, shortsighted coyote chases a roadrunner off a cliff but doesn’t start falling until he looks down and realizes he’s left solid ground. Up until this 'Wile E. Coyote' moment, his belief that he’s on solid ground prevents him from falling. For investors in dollars, the 'Wile E. Coyote' moment comes when they realise that their expectations are inconsistent with any feasible adjustment path.
So, I wonder if in a few years I will be attending (or giving!) presentations at academic conferences with titles like "Wile E. Coyote Moments in a 2-Country DSGE Model," "Estimating the Probability of Wile E. Coyote Moments: A Bayesian Approach" and "Can Wile E. Coyote Moments Explain the Equity Premium Puzzle?"

If the "Wile E. Coyote Moment" becomes part of our language, it will eventuallly show up in our textbooks. I'm no theorist, but here's how I think the standard PhD micro text, Mas-Colell, Whinston and Green's Microeconomic Theory, which is beloved in some (but not all) quarters for its "rigor and generality," might define it:

If there are any theorists reading this, perhaps you can suggest some related theorems, lemmas and corollaries...

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