Wednesday, July 20, 2011

Krugman and Keynes, Part II

I am currently on vacation in the back woods west of Ottawa, but my brother just had internet service put in, and I made the mistake of catching up on my email. Someone was urging me to write something about this emission by Paul Krugman, who is writing about a piece he read by Ezra Klein in the Washington Post. Let's just work from the last paragraph:
Klein suggests that what went wrong in the Great Depression was that people hadn’t read Keynes yet; well, what went wrong and continues to go wrong in the Lesser Depression is that eminent economists, or at those so judged by their peers, turned their back on everything Keynes learned.
First, what do you think Keynes actually learned? No one really seems clear on this. In what profession are people still arguing about the meaning of a book written in 1936? As best we can make out, there are two more-or-less coherent modern versions of Keynesianism. One model is the multiple-equilibrium coordination failure version of Keynes, that comes to us by way of John Bryant, Peter Diamond, Russ Cooper, Andy John, Roger Farmer, Jess Benhabib, etc. A calibrated version of this type of model was fit to the data by Farmer and Guo. A second model is that developed by Mike Woodford, and subsequently (with many bells and whistles) fit to data by Smets/Wouters and Christiano/Eichenbaum/Evans.

Both of these modern Keynesian models are actually versions of a basic Cass-Koopmans-Brock-Mirman-Kydland-Prescott neoclassical growth model - the basic framwork we teach to graduate students as a starting point in all serious contemporary macroeconomics core courses for PhD students. As such, modern Keynesianism is just another tweak. Add some increasing returns and you get multiple equilibria, and maybe some role for government in coordinating on good equilibria. Add some sticky prices and wages, and you get some role for government in correcting relative price distortions.

Of course, these are not the only tweaks we might want to think about. Search frictions are useful for thinking about the dynamics of the labor market and unemployment. Private information and limited commitment are useful for thinking about the role of assets in exchange, monetary policy, and how credit markets work (or do not work).

Now, if you were to choose your tweaks in order to make sense of the financial crisis and the recent recession, what would those tweaks be? Well, I am not a betting person, but if you forced me to put up some cash, it would not be riding on sticky wages and prices. I've thought about that (go back and search my posts) and I can't force it to make sense. As for multiple equilibria, maybe one could get some mileage out of that, but I don't see anyone trying. Want to learn about financial crises and what governments should do about them? Want to understand unemployment and why it so high? Turn your back on Keynes.

52 comments:

  1. If you ignore market clearing, expectations and forward-looking behavior you can get whatever results you want. Maybe this is Krugman's suggestion...

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  2. The trouble with the multiple equilibrium version is that you cannot explain why you usually have a close to full employment equilibrium or, for that matter, why we are not in a zero employment one. In order to get any traction of that kind of model, you would need to start with this question.

    RV

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  3. Steve,

    I get that you think that Krugman's (to borrow one of your phrases) "a bad guy." My comment may sound like I'm defending him, and to be honest I agree with him more often than not, but honestly that's not what's driving this comment. Anyway, maybe you can help me understand something.

    PK's said on more than one occasion (I'd post links but I don't know how) words to the effect that those who approached the "great recession/lesser depression" with a basic textbook Keynesian-flavored model, a la Samuelson, Gordon, Farmer and even Friedman, have consistently made accurate predictions about things like how inflation would (not) respond to a big increase in the monetary base, or how a big increase in gov't borrowing wouldn't lead to a rise in interest rates. Based on data so far, that's hard to argue with.

    My question is (and here I admit that I haven't read your papers with Randy Wright), what does your preferred model (or models) predict about such events? If you've made different predictions, how can you explain the recent run of data? If you've made the same predictions for different reasons, what are they? I once heard Chris Sims say that "a model is as a model forecasts." That may not have been his position, but it's certainly one criterion to use. So, have things turned out the way you thought say 4 1/2 years ago?

    PS

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  4. Steve,

    What about the most recent keynesian model by Roger Farmer? http://www.amazon.com/Expectations-Employment-Prices-Roger-Farmer/dp/0195397908/ref=pd_rhf_p_t_2

    Are you including it in your forthcoming (5ª) edition of your book Macroeconomics?

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  5. Steve,
    How does the predictions of your model differ from the Keynsian/New Keynsian/Zero Bound/etc. models?

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  6. "As for multiple equilibria, maybe one could get some mileage out of that, but I don't see anyone trying."

    That's not what Krugman, DeLong, Thoma, etc. are essentially arguing?

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  7. The multiple equilibria stuff didn't work -- the models required unreasonable increasing returns to scale to deliver sunspots, and have inconsistent predictions about labor market variables as well.

    Krugman just wants people to go back to the macro he understands, so as not to look stupid.

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  8. RV,

    How are you defining "full employment?"

    Pete,

    I don't make forecasts. If you read Krugman carefully, he does not either. His statements are so carefully hedged that he can't be wrong. He certainly doesn't give us any numbers, does he? Then, he is quite fond of looking backward and drilling us on how prescient he is. I don't understand how you could be sucked in by that nonsense.

    Actually, forecasting can be done as well, or better, without economic theory than with it. Note that inflation forecasts are notoriously bad in any case.

    "How does the predictions of your model differ from the Keynsian/New Keynsian/Zero Bound/etc. models?"

    They actually tell you how monetary policy works - at the zero lower bound or whatever.

    "That's not what Krugman, DeLong, Thoma, etc. are essentially arguing?"

    No, they are arguing Keynesian cross, or IS/LM when they are being sophisticated.

    "Krugman just wants people to go back to the macro he understands, so as not to look stupid."

    Bingo.

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  9. Pete: "PK's said on more than one occasion ... that those who approached the "great recession/lesser depression" with a basic textbook Keynesian-flavored model, ...have consistently made accurate predictions about things like how inflation would (not) respond to a big increase in the monetary base, or how a big increase in gov't borrowing wouldn't lead to a rise in interest rates. Based on data so far, that's hard to argue with."

    When did PK forecast inflation and to what forecasts are these to be contrasted? Ditto for the interest rate forecasts.

    Only fairly naive people would confuse the rise in the M base with a rise in aggregates. See Friedman and Schwarzt on the Great Depression.

    I do recall Christina Romer's (Keynesian) 2008-2009 forecasts about unemployment and the effects of the stimulus being extremely inaccurate. In fact, it would have been hard to do much worse.

    I am not taking sides in a modeling contest but I think that you are arguing against a straw man.

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  10. "They actually tell you how monetary policy works - at the zero lower bound or whatever."

    While the descriptive mechanism of how things work is useful, what really matters is whether its predictions hold up as events unfold. Can you please do a post, where you make specific predictions about how new monetarism and NK/other models should make different predictions. Of course, events may not play out in practice, but it will be a good exercise for us to understand the innate differences between the different models.

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  11. As I said, I don't do forecasts. However, some of the models I write down, and other ones in existence, are useful for thinking about policy. When I write about the Fed and monetary policy, I use those models to think about what the Fed should be doing. Here's a case where I differ with Krugman. His inflation model is a Phillips curve. I think inflation is a monetary phenomenon, but what that means is quite different from what Friedman thought it meant. Go back and read my posts if you want more detail.

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  12. "As I said, I don't do forecasts. "
    Isn't that another way of saying I don't test my models? Let me ask you another way. What data would force you to change your mind about your priors?

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  13. Full employment = something close to 100% of people who would like to wor working. My point is, unemployment rates inthe US have been very rarely above, say 6% (i hope you agree 94 Is close to 100). Multiple equilibria model don't tell us why this should be so.

    To wit, someold keynesians after the Great Depression used to believe that absent government intervention unemployment would be ever increasing.

    -RV

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  14. "I can, however, construct models and test their predictions."
    http://newmonetarism.blogspot.com/2010/11/eggertsson-and-krugman.html

    "I don't make forecasts."

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  15. There is a difference between unconditional predictions and understanding how a system works.

    For example, I don't know of any evidence that there is anything but the slimmest predictive power for major exchange rates. They cannot be predicted -- approximately.

    (All you order-flow people please keep quiet and let me make my point.)

    On the other hand, we can predict what would happen to a country's exchange rate if the central bank governor and finance minister jointly announced that it would be good to raise inflation by 100 percentage points a year.

    Understanding a system -- in some respects -- doesn't imply that one can make accurate predictions.

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  16. "Isn't that another way of saying I don't test my models? Let me ask you another way. What data would force you to change your mind about your priors?"

    Go look at my papers, and you'll see what I do. All I'm saying here is that you would have a lot of trouble with a Keynesian prior given recent data. I'm not making any claims for any models that I have written down, but I think they are informative about current monetary policy.

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  17. "Full employment = something close to 100% of people who would like to wor working."

    That would be zero unemployment. Are you sure?

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  18. ""I can, however, construct models and test their predictions."
    http://newmonetarism.blogspot.com/2010/11/eggertsson-and-krugman.html"

    I can't find this quote, so I have no idea what you are trying to catch me at.

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  19. "Go look at my papers, and you'll see what I do. All I'm saying here is that you would have a lot of trouble with a Keynesian prior given recent data. I'm not making any claims for any models that I have written down, but I think they are informative about current monetary policy. "

    Fair enough. Will try and read your papers.

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  20. I am sure. I mean, this may conflict with other people's definition and perhaps I shouldn't have used the term, but this is what I meant.

    -RV

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  21. (1) What prediction of Krugman about this crisis has been wrong?
    (2) I know you don't like sticky price models. But Hall, in his recent AER Presidential address, finds prices so sticky that he models inflation as an exogenous stochastic process. Ironically, if Keynesian style models are wrong it's because they over-predicted the amount of deflation that we would see, i.e. they assumed prices would move more than they did.
    (3) Christiano, Eichenbaum and Rebelo (2011) in their JPE article do a very good quantitative job of accounting for the recent recession. True they `mimicked', rather than explained, key parts of the recent crisis. But is there a new or old monetarist structural model that does as well on quantitatively?

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  22. RV,

    Typically, a New Keynesian thinks of "full employment" as the equilibrium allocation you get when wages and prices are flexible. In a Woodford-type model, that's the real-business-cycle equilibrium, and it's Pareto optimal. If you have something in the model to generate unemployment, it's more tricky. For example, if you include search (so that you can't have a well-defined unemployment rate), there may be issues to do with bargaining and efficiency. However, after dealing with that stuff, "full employment" would be some dynamic allocation which would include a path for the unemployment rate. And that efficient path for the unemployment rate would most certainly not be zero forever.

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  23. Steve, I get that, which is why I apologized for using the term, which is pretty loaded with theoretical meaning. I will withdraw it from now and try to be more precise.

    My comment was the following: As a stylized fact, unemployment is typically fairly low. 95-97% of the people who would like to work have work. In situation such as the Great Depression or the current recession where unemployment deviates a lot from that, it may seem tempting to think of multiple equilibria model, where unemployment can be anything. However, then you cannot explain why it is that most of the time it is comparably so low.

    -RV

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  24. To second last anon:

    You meant the multiplier paper? I've seen it as the version of NBER working paper. The point is to illustrate the possibility of large spending multiplier at constant interest rate, in particular zero. They just show the large multiplier is plausible even examined with the time series during crisis.

    Could you specify where in the paper CER explain the crisis?

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  25. I suggest a model that can perfectly mimic a crisis: people like crisis and the gov't supplies crisis by suppressing market prices a la Taylor rule. Period.

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  26. Anon 3:15, in what way does a govt suppress market prices with a "Taylor rule?"

    When the govt buys or sells anything -- F-18s, concrete for roads, chalk for school boards --- it changes market demand.

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  27. with the blessing of Taylor rule, the central bank can control the nominal interest rate (price of money forgoing holding bond) even without buying or selling any bond

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  28. "with the blessing of Taylor rule, the central bank can control the nominal interest rate (price of money forgoing holding bond) even without buying or selling any bond"

    This is so wrong there is no way to redeem it.

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  29. Hm. What Keynes meant in 1930 is irrelevant. What is relevant is whether using Keynesian models you end up with predictions that make you money.

    In science, Models are not judged on their simplicity/ellegance, not even on their coherence but on their accuracy of their predictions. If an incoherent model gives you better predictions than a coherent one, you dump the latter. We did dump coherent Hamiltonian mechanics in favour of incoherent back-and-forth between quantum mechanics/general relativity when we had to build spaceships.

    I dissagree with Krugman politically. Krugman -politically- for me is the Devil. But he was right on interest rates. Delong too. Cochrane wasn't. Fama wasn't.

    If using a Hicks/Keynes framework you make correct predictions about interest rates you are a scientist. If you have ellegant/coherent models and your predictions are wrong you are an astrologist. They too have coherent and elegant models, whose only problem is disagreement with reality.

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  30. "In science, Models are not judged on their simplicity/ellegance, not even on their coherence but on their accuracy of their predictions."

    I don't know what predictions you are talking about. Unconditional? Conditional? Are you trying to predict the outcome of a policy action?

    The difference between physics and economics is that economics is trying to make predictions about intelligent actors who respond to expected policy.

    A big part of the difference between modern macro and naive Keynesianism is that the latter recognizes this and doesn't assume that people are systematically fooled by policy.

    Anon 9:33 is exactly right.

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  31. can't agree any more, that is the point of anon 3:15pm.

    what is the point of having perfect explanation power of jamming 1 million shocks in DSGE?

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  32. "I don't know what predictions you are talking about. Unconditional? Conditional? Are you trying to predict the outcome of a policy action?"

    Not necessarily, but yes, from my Popperian perspective, a correct model that is properly applied should be able to make predictions that correspond to the state of the world. Obviously, the most interesting predictions are about things that people care about most, such as the interest rates in the future.

    Krugman/Delong, using a Hicks/Keynes framework (which I was never taught in my highly prestigious phd program) predicted interest rates would stay low. Cochrane/Fama and co, using their tools (which I was tought in my phd classes) predicted that government borrowing would crowd out private investment and lead interest rates higher.

    In that sense, Krugman/deLong were right and unless they are lying about using a Hicks/Keynes framework and derived their predictions using some aspect of Kydland/Prescott that my (highly prestigious and widely cited) macro professor forgot to teach me, the Hicks/Keynes models have it.

    This is the interesting question for Science. Whether the Smets/Wouters is a Kenynesian or an RBC model, is a question for literary critics and historians of knowledge, not scientists.

    Full disclosure here: I am a Friedmanite, so politically I am much closer to Corchane than Krugman. And yes, I am using blog anonymity to say things I'd never say to the teaching staff of my faculty in person, but I hope you can cut me a break on this one, I am done with my dissertation in a few of months and something tells me that telling my views openly to someone who believes "turn your back on everything Keynes said" (no the author of the blog is not my teacher, but most of them are like-minded) would be a really bad carrier move. And since I am presently on my first vacation after 4 years working day and night on what my teachers thought to be correct (and most of it was), I hope I will be taken seriously, when I say this whole thing smells kind of fishy. I must also say that even though I am very happy with the education I received at my present school, I kind of regret not going to Princeton where I had also been accepted. Of course I might be wrong, but it's kind of painful to see your teachers tell you "Krugman Bad!! Krugman Bad!!" while producing inferior predictions. If I wanted someone to tell me "Krugman Bad!!" all I had to do would be reading capitalism and freedom (which is what I did). From a Phd program that required on average 12hrs of study/work per day including weekends, I thought I was going to get something more, such as models that correspond to the real world better than those of the Keynesians.

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  33. Did you learn nominal wage/rigidities? I would be surprised to hear of a phD program that doesn't teach them, even if it's at a place that's generally hostile to NK stuff. Even Minnesota.

    I'm not at all convinced that Krugman/DeLong were using Old Keynesian models- i'm not convinced they were using any model at all really, perhaps old keynesian assumptions. But using Old Keynesian assumptions also implies you accept old keynesian fiscal multipliers, which presumably was the reason they beat the drum so hard for fiscal stimulus.

    So you can gussy up a model that implies large fiscal multipliers. Neat. I can do the same with negative technology shocks. I think the idea that negative technology shocks drive the majority of business cycles is absurd. I can also give you a NK model with rather small implied fiscal multipliers. Oh no, we've got several modern microfounded models with wildly differing conclusions about the fiscal multiplier. So what do we do? Look at the data...

    Empirically measured fiscal multipliers simply don't appear to be very big at all. The CBO estimated the ARRA multiplier to be roughly one- pretty damn far from 1.5. Or you can look at Barro's forthcoming QJE which looks at military spending in time of recession. Since wartime spending can basically be taken as exogenous you cut through a lot of the measurement problems you've normally got with time-series econometric stuff... And the implied fiscal multipliers are almost embarrassingly small.

    So I don't think the experience of the United States and Krugman/Delong being right in some predictions implies a coming OK revival. Those predictions could be made with standard NK models which as far as I know are taught everywhere and are the mainstream, like them or not. If anything I think we can rebury the risen-dead that is traditional fiscalist Keynesianism. There's only so many times sensible people can tolerate the "OH COME ON MAN, we didn't even try it, it's still a good idea" trick with fiscal stimulus.

    You can also look at the experience of Britain... yes there was a fairly modest fiscal consolidation, but the central bank reacted, spending increased significantly and... well, the output gap didn't narrow, they got inflation. I'm not especially familiar with the odd Post Keynesians, but that might be consistent with their views- I don't think they see any role for monetary policy, viewing fiscal policy as the end all be all. But it's also consistent with RBC, and it's not consistent with the modern Keynesianism most people think about.

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  34. Of course I was taught these things, I'm not saying that the teachers hid away NK models or anything that the Keynesians did - Krugman's 80s and 90s stuff were also available for anyone interested in the relevant courses. In fact I still find NK modelling one of the most useful things I was taught.

    My problem however is on scientific grounds. When discussing the economy, an RBC guy would tell you something like "using my model you'll understand better" or to quote the blog post "Want to understand unemployment and why it so high? Turn your back on Keynes.".

    Sorry, but being a Friedmanite, I don't care about understanding. If I wanted to understand unemployment, I'd be studying sociology. Scientists, don't understand, scientists predict. If a model makes good predictions (i.e. tells you that the interest rate will drop and it does), it doesn't matter if it's coherent or not.

    Of course, understanding is important. But both Krugman and Prescott would say "Yes! I understand". I can't possibly know who understands better, but I can check out who produces better predictions. General relativity will make you understand the macro universe less than Hamiltonian Mechanics. General Relativity is also not well-microfounded. But general relativity produces better predictions than Hamiltonian mechanics, this is why physicists accept it as the most accurate description of the macro universe. They couldn't care less about understanding, they only care about predicting, why should we be any different?

    So this is my problem. Most of my teachers have very similar attitude as in the blog post above, many of them much worse (and I am talking names with 4+ pubs in top5 here). But my take is that when you are a guy who has been saying "interest rates will go up" for the past 3 years, while simultaneously dismissing the framework of another colleague that has correctly predicted they will go down, you owe to explain to your students why we should turn out back on the incoherent model that makes good predictions in favour of the coherent one that doesn't. The point of science is to be correct, not to be coherent.

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  35. ^No, you've got it wrong. Predictions are just moments. We should discard models that are inconsistent with those moments, but we shouldn't accept incoherent (that is, physically impossible) models that are consistent. Grow up, quit whining about your shitty program (I doubt you're a top 20), and make some progress. Calling yourself a Friedmanite is just an attempt to associate yourself with someone better than you.

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  36. Seemed unnecessarily harsh...

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  37. "Seemed unnecessarily harsh..."

    Perhaps, but crap like that is what pollutes the air. He offers nothing but whining.

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  38. OK is dead because of Phillips curve. Unless it is fixed, which is an agenda for NK, we have no reason to rely on it anymore to draw any implication on the gov't spending multiplier.

    It seems that people talk and listen to OK just for political reason.

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  39. Anonymous 6.34, first, i'm not whining, in fact i've said I'm quite satisfied with my (actually ranked higher than princeton's) program, my teachers etc. All i'm saying is that as long as you accept that the validity of a model comes from the accuracy of its predictions, you can't help wondering what were the analytical tools that made people like Krugman make correct calls on inflation, interest rates and so on. To me, it just seems kind of, ahem, stupid to say "Turn your back on Keynes! Keynes bad!! Krugman bad!!" the same way it would seem stupid to say "XXX bad!!" if XXX has a few thousands citing his articles and a Nobel prize on his back.

    As i said, incoherent does not mean "physically impossible". Quantum mechanics and General relativity are not coherent with each other but they are physically possible. This is a very uncontroversial point in philosophy of science, physicists accept it, chemists accept it and yes, economist should too. You seem to mix up consistency and coherence, so here's something for you to read before you go around telling people to grow up:

    http://plato.stanford.edu/entries/justep-coherence/

    "Predictions are just moments". OK, there's some truth to that. However, a guy that got it right might have just gotten lucky, or might be correct. On the other hand, a guy that got it wrong was... well using a model that was wrong (or misusing a correct model which is even wrong). But let's forget about Krugman being right about the interest rates for a sec.

    In the 70s, it was Friedman who made the correct prediction. If economists had come out saying "predictions are just moments" and simply dumped the philips curve without bothering going into what made Chicago School models make the correct predictions, it would be stupid right?

    But that was Chicago in the 60s.

    Cochrane 2009:
    ". The Fed and Treasury are essentially running the world’s largest hedge fund: short treasuries and long a lot of obscure6 credit risk, in Wall Street parlance. Some of the Fed’s assets are inherited from various bailouts. When it’s time to unwind, will these assets be worth anything? [...] Buying $700 billion or so of worthless mortgage securities at inflated prices will not stir a magic liquidity pot to make $10 trillion of them more valuable, but will leave a several-hundred-billion dollar hole in the accounts.

    [...]

    Some say, “we’re in a crisis, we can’t worry about the long run or inflation.” However, the inflation can happen much sooner than you might expect, and it can happen long before the economy recovers. We are in a credit crisis, as well as experiencing a fall in aggregate demand. Even with perfectly managed aggregate demand, output will be lower while we rebuild credit markets, and there will be unemployment as people move from building houses to other jobs. We can easily have stagflation of monstrous proportions, and it can happen very soon after stimulus spending gets going."

    So yeah, once you have been continuously wrong for 2 years about inflation, stagflation and the fed PnL and you haven't dumped the model that got you there, you can't really expect other people to "turn their back on Keynes/Krugman" just because you said so, right?

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  40. Here is a simple reason why understanding the mechanism and having a coherent model is important: Policy. Another reason? Welfare analysis.
    You need to understand what friction is distorting which margin. Otherwise, you keep penetrating wrong margins and get no results. Example: spending on bio research to put construction workers back on the job.
    I don't think the writer of this blog is promotong a frictionless plain vanilla RBC model against any variety of Keyensian models. His point is that we need to stop shifting curves around and start thinking more seriously about detailed models with relevant frictions in them.

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  41. ^OK, agree with this, except for one thing. There is no way to distinguish what is coherent from what isn't. Coherence, or justification of a model on the basis of coherence was a problem solved for us by people like Popper and Quine, 70 years ago. If you want to go into details, start by my link above and wonder around the site, but for now let me say that heir uncontroversial and widely accepted by natural sciences insight on the positive justification of a model on the basis of coherence is an impossibility. The best we can do is to measure the accuracy of a model's predictions. That's how scientists work, except some economists. Now a model that tells you something that is consistently wrong for the last two years, is obviously wrong. I'm not claiming that we should all start shifting curves, I'm saying that if a model's ex ante predictions do not correspond to reality, we should simply dump them and ask what's the alternative.

    Oh and to be honest, yeah, Krugman is an ass, but when he was writing his best papers he didn't say "rational expectations are heterodox crap", neither did Mankiw etc. So no, even if he's an ass, it just seems wrong to say the polite equivalent of "screw them and Keynes", in my world you can only do this once they have been wrong and you have been right.

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  42. Yup agreed. I too think Krugman is an ass. But watching Fama, Cochrane, Williamson and the ilk throw nothing constructive other than PK is an embarrassing ass has been, well, embarrassing. I didn't think there was a fresh/salt water divide when PK first resurrected that nonsense. But, its clear that at least some students of former freshwater schools are totally detached from reality.

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  43. "Krugman/Delong, using a Hicks/Keynes framework (which I was never taught in my highly prestigious phd program) predicted interest rates would stay low. Cochrane/Fama and co, using their tools (which I was tought in my phd classes) predicted that government borrowing would crowd out private investment and lead interest rates higher."

    I read your quote from Cochrane and I would not have interpreted it the same way that you apparently did. That is, I would not have assumed that it was a prediction that interest rates were about to rise. It was a warning about the value of the Fed's portfolio when interest rates do rise ... as they eventually will.

    And Cochrane might have said something about crowding out at some point but I didn't see it in the quote that you provided.

    BTW, I disagree with Cochrane's views of the macroeconomy in several ways, so I feel no compulsion to defend him.

    I just think that you are reading way too much into his words.

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  44. "The point of science is to be correct, not to be coherent. "

    Exactly.

    "Grow up, quit whining about your shitty program (I doubt you're a top 20)..."

    Ass.

    "Perhaps, but crap like that is what pollutes the air."

    A second ass, if not the same.

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  45. "The point of science is to be correct, not to be coherent. "

    No, it is to be both correct and coherent. Incoherent models may make correct predictions, but there is no way to understand why. Therefore, those models are useless. Incorrect models, prediction-wise, at least are useful for understanding why they went wrong.

    This self-proclaimed Friedmanite is really no better than Matthew Yglesias -- a useless voice in a world already contaminated by many idiots. Get back to work and come back when you have something useful and constructive to say, such as why I should care about the ramblings of a philosopher from 80 years ago.

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  46. And one more thing, you seem rather focused on Cochrane. I'm sure you could dig up some quote by a freshwater economist that comes off as silly/wrongheaded, but Cochrane isn't a particularly good example. He is very very into the fiscal theory of the price level and that guides a lot of his macro views. But it's not really something that's commonly accepted at Minnesota or wherever else.

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  47. it seems that scuttlefish is very close to minnesota. beside he wrote some competing papers against Chari and Kehoe, why Minnesota guys don't like Cochrane's idea? The theory looks making sense: price level is adjusted to reflect gov't balanced budget in the eqm

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  48. The fiscal theory of the price level is incoherent because it does not specify the game completely -- it is a constraint on the choices of the government, not a condition the government must take parametrically. The government is not a small actor.

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  49. Scuttlefish hit it on the nailhead. Thanks.

    RV

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  50. I wish you would spend more time writing about economics and less about Krugman. You seem to love the guy!!!

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  51. "In what profession are people still arguing about the meaning of a a book written in 1936?"

    This sounds like an easy way to dismiss the book and move on to New Keynesian theory rather than address the book and Krugman's claim itself. Don't you think?

    Are you trying to claim that the book has lost its meaning or was meaningless when written since it was written so long ago? Would that mean we have to dismiss Newtonian Physics, Euclidean Geometry, Darwin's Natural Selection and the Theory of Relativity simply because they're "old"? Seems to me a lot of professions are still arguing about ideas and theories written in books that are a lot older than Keynes' General Theory.

    It would be nice if you could clarify this point.

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  52. Clarification:

    Keynes wrote the book in a hurry. Here's part of what has been accomplished in economics since: Samuelson's Foundations book, Arrow-Debreu, progress in econometric methods and data collection, growth theory, game theory, mechanism design. Keynes didn't have that technology available, but if he had he would have done a much better job. We have the benefit of all of these useful tools that make our job much easier. You can read through the general theory and find a few fragments of useful ideas, but if you are looking for ideas that can push the science forward, that's not where to look. The General Theory receives much more attention than it deserves. Put it on the shelf with all your other old books. Maybe get it out once in a while, but don't put it on a pedestal as some ultimate truth.

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