Timeline for What does "first-order effect" mean?
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6 events
| when toggle format | what | by | license | comment | |
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| Jan 7, 2020 at 21:15 | comment | added | demully | So do currency declines cause/correlate with higher real interest rates? No, because a strong economy tends to lead to stronger currency, and higher real rates. Both are first-order effects of a strong economy. However, if the currency tanks, that is inflationary, and inflation produces a policy response, in the form of tighter monetary policy. Higher real is a second-order effect from a weaker currency. Even if higher real and a stronger currency are first-orders of the economy. Different parts of the calculus can pull in different directions. | |
| Jan 7, 2020 at 21:10 | comment | added | demully | A slightly different and more general distinction between a "first-order" versus a "higher order" effect (the latter being exactly as above) is that there is no direct impact. dC/dX = 0. dC/d(X^y) can also be zero, which is the higher-order effect above (perfectly correctly stated). However dX/dZ and dC/dZ might not be zero, in which the case the chain rule kicks in. Buying the asset might not change my consumption; but it might change my preference/aversion for something else, which in turn might affect my consumption. Simple thought example to follow... | |
| Jan 7, 2020 at 13:19 | answer | added | Koval Boris | timeline score: 4 | |
| Oct 29, 2019 at 13:13 | comment | added | Aqqqq | @AlexC Thank you for your comment. Am I correct that the reason why "it has no first-order effect on the variance of your consumption stream." is that only "a little bit more of such an asset" was bought? | |
| Oct 29, 2019 at 3:36 | comment | added | Alex C | If you make a small change $\epsilon$ to a sytem and the result is a change proportional to $\epsilon$ that is a "first order effect" (i.e the impact is comparable to the change), if the change is proportional to $\epsilon^2$ that is a "second order effect" (small effect compared to the change), and so on. | |
| Oct 28, 2019 at 20:53 | history | asked | Aqqqq | CC BY-SA 4.0 |