tag:blogger.com,1999:blog-2499715909956774229.post4147341316915441936..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Simple-Minded Pseudo-MacroeconomistsStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger45125tag:blogger.com,1999:blog-2499715909956774229.post-73044461247403918002011-10-11T13:29:23.046-07:002011-10-11T13:29:23.046-07:00@8:55 Anonymous: CKM show that the investment wedg...@8:55 Anonymous: CKM show that the investment wedge doesn't play a large role in fluctuations. However, that is not at all the same thing as saying that financial frictions do not play a large role. They show that financial frictions usually map to labor or TFP wedges, both of which play a large role in business cycles.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-249324430432336522011-10-09T21:20:04.909-07:002011-10-09T21:20:04.909-07:00Is there anything that can be saved in the Minneso...Is there anything that can be saved in the Minnesota approach to macroeconomic fluctuations?"O" Anonimohttps://www.blogger.com/profile/07896236826318022479noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-49757807963932957082011-10-09T20:55:51.062-07:002011-10-09T20:55:51.062-07:00Not true - there are no technology shocks in CEE. ...Not true - there are no technology shocks in CEE. Important detail. In Christiano's newest work, he does allow for technology shocks but finds that financial market type disturbances are the ky to business cycles. One more thing Chari, McGratten and Kehoe were wrong about.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82457185755374271722011-10-09T20:32:53.466-07:002011-10-09T20:32:53.466-07:00Really! Most of the output fluctustions in a C&am...Really! Most of the output fluctustions in a C&E model are from trchnological shocks.From Minnesota with lovdnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56191424650573441062011-10-09T14:34:34.053-07:002011-10-09T14:34:34.053-07:00CEE estimate their model via GMM which does have o...CEE estimate their model via GMM which does have over identifying restrictions. But it's clear that we're into religion here so there's no point in pursuing matters. Have fun with playing with technology shocks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-84395629678680210762011-10-09T14:17:38.835-07:002011-10-09T14:17:38.835-07:00C&E do not estimate their model via MLE. Furt...C&E do not estimate their model via MLE. Furthermore, i do not have to be able to find a cure for the flu before I can rule out echinesa as an effective remedy. So i do not have to have a better model before I can rule their one out as worthless. Perhaps monetary policy has little effect on the real economy.From Minnesota with lovenoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-19599473342655611692011-10-09T14:09:13.762-07:002011-10-09T14:09:13.762-07:00Sorry for typos. I meant to conclude by saying `Th...Sorry for typos. I meant to conclude by saying `The Lucas critique needs to be applied with more nuance or you will reject all models that you or I will ever see. In the end empirical judgements must be made.' It may be correct that you don't like CEE. But what data are you referring to and what model do you like more?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69256995218614565322011-10-09T14:04:46.253-07:002011-10-09T14:04:46.253-07:00I can't imagine what you mean. The cowles comm...I can't imagine what you mean. The cowles commission defined a parameter as being structural relative to a class of interventions. Can any model be invariant to all interventions? Of course not. Lagos and Wright make reasonable but very strong assumptions about day time and night time markets. Surly there are policies which would cause agents to re-organize. But that doesn't mean Lagos and Wright is useless because it fails the Lucas critique. The Lucas critique needs to be applied with more nuance or you Williams to reject all models that you or I have seen. In the end Potugal judgements must e made.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-28323088012219811962011-10-09T12:30:03.974-07:002011-10-09T12:30:03.974-07:00The most honest assessment of DSGE comes from Caba...The most honest assessment of DSGE comes from Caballero, who says they are not yet ready for policy analysis. The CEE type models mentioned by anonymous above are of course useless for this purpose since they totally fail the Lucas critique, just like the old Penn-MIT models of the 1960s.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58283548167101264772011-10-09T07:37:16.372-07:002011-10-09T07:37:16.372-07:00I guess you think maximum likelihood is a obviousl...I guess you think maximum likelihood is a obviously a bad idea. In fact there is a long tradition of using MLE in economics: even in Minneosta - see Hansen, Sargent and Sims. In any event, CEE type models has loads of over identifying restrictions so it is incorrect to say that it has to fit the data.<br />As for out of sample predictions: the FED, the ECB and the IMF use variants of the model all the time to analyze out of sample scenarios and find that the exercises are useful.<br />Finally, what concrete alternative do you have in mind?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50808652870324195822011-10-08T19:27:59.731-07:002011-10-08T19:27:59.731-07:00The Northwestern approach is to reverse engineer t...The Northwestern approach is to reverse engineer the model until it fits the data. It has little value because a C&E model will always fit the data they are analyzing. It will be useless for out-of-sample events, that deviate from the data set that C&E used.From Minnesota with lovenoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-90338640050366754812011-10-08T16:57:25.917-07:002011-10-08T16:57:25.917-07:00There is a reason that Christian Eichenbaum and Ev...There is a reason that Christian Eichenbaum and Evans' model is the foundation of modern quantitative policy models and is used by every central bank in the world: it gives great insights, it provides an excellent account of the data and is being extended to allow for financial market frictions. <br />What quantitative model is the alternative? Please don't about scream bells and whistles: every model including Lucas' Jet piece makes strong assumptions.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-42381708852267759052011-10-07T16:09:49.323-07:002011-10-07T16:09:49.323-07:00Personally, I find this piece to be pretty convinc...Personally, I find this piece to be pretty convincing. Any thoughts?<br /><br />http://web.econ.unito.it/bagliano/macro3/krugman_orep00.pdfAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-16666543562462034882011-10-07T13:17:35.864-07:002011-10-07T13:17:35.864-07:00Economists need to show some professional ethics. ...Economists need to show some professional ethics. In physics they don't tell students any longer, like they did in the 1950s, that electrons orbit around the nucleus. In psychology they no longer tell students, like they also did in the 1950s, that babies are born blind. In medicine they no longer believe that antibiotics cure colds and flu. So stop teaching students that the IS/LM model describes the world.Mr MITnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59367186605502099982011-10-07T13:03:03.817-07:002011-10-07T13:03:03.817-07:00Josh,
If the world, or at least the human part of...Josh,<br /><br />If the world, or at least the human part of it, is non-ergodic, does the notion of "systematic errors" still make sense? <br /><br />The possible outcomes of a decision don't present themselves ready-made for the decision maker. Rather, agents must imagine possible sequels to the alternative courses of action they're considering. If they can't imagine all possible sequels, would the errors that (are likely to) follow be systematic? Is our inability to imagine all outcomes a source of systematic or only random errors?<br /><br />If black swans of one kind or another pop up from time to time, but people continue to ignore the tails of the distribution, is that a systematic error or a source of systematic errors?<br /><br />Can rational investors always make money by exploiting systematic errors (assuming this notion still makes sense)? <br /><br />The problem is not so much that decision makers aren't rational (though you'll find very few people who understand even the most rudimentary principles of probability), but that the subject matter of our judgments may be an inappropriate object of a probability distribution.<br /><br />And, yes, the same problem faces policymakers.Greg Hillhttps://www.blogger.com/profile/09422264577421199573noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-46061650408607064032011-10-07T12:48:37.694-07:002011-10-07T12:48:37.694-07:00"The main insight of RatEx is the idea that i..."The main insight of RatEx is the idea that individuals do not make systematic errors. I think that is a fairly reasonable assumption."<br /><br />Rational Expectations, from what I've heard, says that people are paying attention to politics and government economic policy and a great deal of information about the macroeconomy, and so they see the patterns and anticipate and see what's going to happen and change their plans and behavior accordingly in a rational skilled sophisticated way.<br /><br />But if the vast majority have little idea of what's going on, have little knowledge of economics to analyze it well, then how are they going to do what RatEx says they will? How? How?? How can you change your plans and actions based on government economic policy when you don't even know what government policy is, and even if you did, you have little economics education to know how to change it in the optimal way that RatEx assumes you will.<br /><br />Surveys again and again and again and again show stunning ignorance of the economy and politics, which is understandable given how complicated the world is and how busy people are. And from what I've seen, RatEx doesn't just say people don't make systematic mistakes (which they do anyway, like always blaming the party in the Whitehouse for the current economic cycle no matter what). If people's mistakes are only idiosyncratic, but huge, you will still have RatEx being a very weak factor in economic behavior, a near sunspot.<br /><br />Stephen, suppose you have a factor like RatEx, which in reality has strength of just 1 in the economy (with 10 being everyone does it always with 100% skill, education and sophistication). Now you have two models: one ignores RatEx, giving it thus a strength of 0. Another goes to the other extreme and assumes everyone does it always with 100% skill, education and sophistication, thus giving it a strength of 10. If the real strength is only 1, then which model is closer to reality. Is 0 closer to 1, or is 10 closer to 1?<br /><br />Now, ideally you're going to, when you make your interpretations to reality and policy, adjust up when you use the zero model and down when you use the 10 model, but at a first unadjusted cut, which model, if all other things are equal, is closer to reality?Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2735131983285077642011-10-07T09:59:45.167-07:002011-10-07T09:59:45.167-07:00Glasner doesn't like IS-LM:
http://uneasymoney...Glasner doesn't like IS-LM:<br />http://uneasymoney.com/2011/10/07/is-lm-and-all-that/Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-39056704831356095932011-10-07T09:19:26.561-07:002011-10-07T09:19:26.561-07:00"But unlike Lucas, who implicitly assumed tha..."But unlike Lucas, who implicitly assumed that market participants could form probability distributions over future outcomes on the basis of historical market data..."<br /><br />This is a classic critique of rational expectations, but fails to recognize a key point. Here is Bennett McCallum in the JMCB from 1980:<br /><br />"The basic idea of the [rational expectations] hypothesis is simply that economic agents behave purposefully in collecting and using information, just as they do in other activities, an idea that it is hard for an economist to reject without considerable embarrassment. But in practice, of course, this compelling idea usually gets translated into the requirement that expectations are, in the model at hand, formed in a way that is stochastically consistent with the behavior of the realized values of the variables in question. This is clearly a much stronger hypothesis, one that an economist can reasonably dispute...[This assumption, however] has one outstanding strength, namely, the weakness of its competitors. Each alternative expectational hypothesis, that is explicitly or implicitly posits the existence of some particular patter of <i>systematic</i> expectational error. This implication is unattractive, however, because expectational errors are costly. Thus purposeful agents have incentives to weed out all systematic components...<br /><br />Adoption of the strong, operational version of the rational expectations hypothesis does not, in my opinion, compel the analyst to believe that there are not detectable patterns in expectational errors of the past."<br /><br />After 30 years, people are still arguing that rational expectations is a useless concept because it assumes that economic agents know everything. The main insight of RatEx is the idea that individuals do not make systematic errors. I think that is a fairly reasonable assumption.<br /><br />In addition, if the world is really non-ergodic, then this applies to the decisions of policymakers as well. This would seem to rule out fine-tuning policies; something that many advocates of this critique of RatEx seem unable to recognize.Joshhttp://everydayecon.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64135462329533904472011-10-07T09:00:59.040-07:002011-10-07T09:00:59.040-07:00"Is that why Krugman has been right for the l..."Is that why Krugman has been right for the last 3 years, regarding the size of the stimulus (too low), panicked inflation expectations (he has scoffed, correctly for years), and the austerity bug creating MORE difficulties, rather than less?"<br /><br />Whether he was right or not is impossible to say -- what the data says is merely that G went up and employment didn't. At all. ISLM doesn't work that way, so Krugman MUST say it needed to be bigger. JC is definitely in way over his head here. I suspect that he'd be in way over his head in Intermediate Micro as well. Or maybe even Principles.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-3039273548968639812011-10-06T23:24:58.777-07:002011-10-06T23:24:58.777-07:00JC, I'm not even sure how I would evaluate eac...JC, I'm not even sure how I would evaluate each of those claims, let alone know whether or not they were right.<br /><br />But hey, since Krugman and you already have all the answers, what's the point of even asking the questions?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-34318007604270851522011-10-06T22:06:27.468-07:002011-10-06T22:06:27.468-07:00"That's just it. It does not have useful ..."That's just it. It does not have useful insights. "<br /><br />Is that why Krugman has been right for the last 3 years, regarding the size of the stimulus (too low), panicked inflation expectations (he has scoffed, correctly for years), and the austerity bug creating MORE difficulties, rather than less?<br /><br />Also, your objections substitute math for reality. Angels on the head of a pin. <br /><br />So you describe exactly what Krugman makes fun of - people wedded to their model, stuck in a small abstract circle of math, not much related to the real world.JCnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69343882296734287222011-10-06T20:09:22.571-07:002011-10-06T20:09:22.571-07:00Stephen,
Thanks for supplying your substantive cr...Stephen,<br /><br />Thanks for supplying your substantive critique of IS-LM. One benefit, for me at least, is that your list of four IS-LM shortcomings bears an interesting relationship to Hicks’s own reasons for abandoning IS-LM.<br /><br />“Lucas critique. The ‘behavioral’ relations in the IS-LM model are not structurally invariant to policy changes we want to consider. The model is therefore going to give you wrong answers.”<br /><br />While Hicks probably would not have affirmed the “Lucas critique” in all its details, he did come to appreciate the fact that the IS-LM diagram doesn’t capture the role of expectations in decision making and, therefore, in outcomes. But unlike Lucas, who implicitly assumed that market participants could form probability distributions over future outcomes on the basis of historical market data (the ergodic axiom), Hicks eventually came to adopt Keynes’s view (elaborated in greater detail by G.L.S. Shackle) that a) such probability distributions are chimera, and b) it’s important to take account of the varying degrees of confidence people attach to their views of the future.<br /><br />“The ‘theory’ backing up the ‘behavioral’ relations (consumption function, investment function, money demand function, principally) are piecemeal and not internally consistent.”<br /><br />Even if one insists on micro (optimizing) foundations for the “behavioral relations” implicit in IS-LM, it’s not clear what these micro foundations would look like if the future can’t be tamed by a well-formed probability distribution. Don’t think of the IS curve as a fixed line; think of it as a something that moves like a leaf in the wind as firms adapt their estimate of returns to new projects to changes in “the news.” Similarly, don’t think of the LM curve as fixed line, but as something that moves about as our degree of confidence (and demand for liquidity) ebbs and flows. <br /><br />“The monetary theory in it stinks.”<br /><br />You don’t say why it stinks, but one shortcoming is that money is exogenous in IS-LM, whereas, in fact, the supply of money depends, in part at least, on the demand for credit. In addition, Keynes gave good reasons for doubting whether the IS and LM curves are independent of one another, e.g., liquidity preference and the expected return to investment will be influenced by similar considerations.<br /><br />“The model is not dynamic.”<br /><br />Let me simply conclude by saying that Hicks came to see Keynes’s theory as belonging to the realm of history rather than to equilibrium.Greg Hillhttps://www.blogger.com/profile/09422264577421199573noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-3398083174210863972011-10-06T16:19:45.762-07:002011-10-06T16:19:45.762-07:00Prof Williamson will get his wish. Look at the age...Prof Williamson will get his wish. Look at the age of these people,Solow, de Long, Glasner, Krugman, Thoma are all pretty old in terms of intellectual capital. I cannot imagine anyone graduating with a PhD in macro now is going to be teaching this ISLM stuff. Science progresses one funeral at a time said Planck. Sad to say that a few more generations of students at Berkeley are not going to be as well educated as say the grads of St.LouisAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43563261915222374782011-10-06T14:33:20.871-07:002011-10-06T14:33:20.871-07:00Well, if you have money, then we have to be dealin...Well, if you have money, then we have to be dealing with an infinite horizon (unless we want to use some trick to go with the finite-horizon case). So now there is an infinity of time-dated consumption goods (or an infinite continuum of goods in continuous time). You can address some fiscal policy issues with two periods, in which case I need two consumption goods (current and future periods). Some monetary issues I can address without thinking about the bonds. Yes, you're right, he's just thinking about IS-LM.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-23980715351696054402011-10-06T14:18:12.872-07:002011-10-06T14:18:12.872-07:00Krugman:
"In macro — or at least macro that ...Krugman:<br /><br />"In macro — or at least macro that tries to get at monetary and fiscal issues — what you need, at minimum, is to understand an economy in which there are three goods: money, bonds, and economic output."<br /><br />This is not necessarily true, but this raises a question, what model used to talk about monetary policy doesn't have this feature or can't be amended to have this feature? (Bonus points if you said the NK model, ironically.) Has Krugman implicitly accepted that search models (with bonds) are adequate? Can it be he has seen the light? Nah. He is talking about IS-LM again.Anonymousnoreply@blogger.com