tag:blogger.com,1999:blog-2499715909956774229.post6348018838297996191..comments2024-03-09T02:22:57.289-08:00Comments on Stephen Williamson: New Monetarist Economics: The Keynesian Cross CrusadeStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger58125tag:blogger.com,1999:blog-2499715909956774229.post-74659827283090005912011-02-06T11:21:52.286-08:002011-02-06T11:21:52.286-08:00I agree completely. I'm an admirer of Neil Wal...I agree completely. I'm an admirer of Neil Wallace, and I have learned a lot from him. However, Neil never wanted to get into giving policy advice. He would say something like: "We're not ready for that yet." In the meantime, Mike Woodford was getting a lot of traction with his ideas at central banks. "Deep" monetary economics attracted a lot of people who were not much interested in quantitative work, but there are some people, like Boragan Aruoba (Maryland) who know the monetary theory and can do the empirical work too. See this paper:<br /><br />http://econweb.umd.edu/~aruoba/research/paper16/paper16.htmlStephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65431354945301211322011-02-06T10:31:15.539-08:002011-02-06T10:31:15.539-08:00I don't mean to denigrate the literature that ...I don't mean to denigrate the literature that you are working on. It is full of interesting ideas. At the same time we are social scientists. So issues can't be settled purely on a priori methodological basis. After all one person's notion of deep is another person's notion of ad hoc. It seems to me that the literature which you are associated will only have have a broad impact if you and others show that it does a better job at organizing and explaining the data than than alternatives (RBC, new Keynesian,...). I'm not being aggressive here. It's entirely possible that you can succeed in this task. But do it you have to try.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31495127891937268632011-02-06T08:43:26.555-08:002011-02-06T08:43:26.555-08:00Not sure if you are the same anonymous as the one ...Not sure if you are the same anonymous as the one with his/her sleeves rolled up above, but I'll assume so.<br /><br />This is how it goes, and you can see it in any number of strands of economic research. (i) Sims writes "Macreoeconomics and Reality," then some guys put together RATS, and everyone can run VARS and produce impulse responses. It's easy. Result: A proliferation of papers. (ii) Kydland and Prescott write "Time to Build and Aggregate Fluctuations," other people learn the computational algorithms and refine them. It's easy, and there is another proliferation. (iii) There may not be a single seminal New Keynesian paper, but this comes out of work by Woodford and others in the mid to late 1990s, and the estimation methods used by, for example, Smets/Wouters and Christiano/Eichenbaum/Evans. Same thing.<br /><br />I'm not trying to make out that I'm superior. You were denigrating a literature that I work in, and I wanted to point out that you are on shaky ground. What I see among some New Keynesian researchers (just as in any other strand of economic research) is a reluctance to ask fundamental questions about their paradigm.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82486241313473549732011-02-06T07:30:09.803-08:002011-02-06T07:30:09.803-08:00You make empirical (and publishing) sound awfully ...You make empirical (and publishing) sound awfully easy. A task left for the less creative proletariat. Sounds awfully cynical and, to be honest, self - serving, to me.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65898169299248029132011-02-05T11:59:12.973-08:002011-02-05T11:59:12.973-08:00RV,
I think the problem is that talk about "...RV,<br /><br />I think the problem is that talk about "demand" takes attention away from the key mechanism which is at the core of the Keynesian story, i.e. sticky wages and prices. Why aren't people saying: "Damn, those sticky wages and prices sure have messed things up since 2008," rather than, "Damn, we have deficient demand." I think the answer is that they think that the idea is easier to sell the second way. No one seems to be pointing out wage or price stickiness in particular sectors of the economy or in particular firms. But if the story is so important, the friction should be obvious. What I'm looking for here is not the usual narrative about infrequent price and wage changes, but specific evidence relating the price and wage stickiness to output in specific sectors or firms.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50521704013715635332011-02-05T11:50:31.750-08:002011-02-05T11:50:31.750-08:00I was actually planning to be an econometrician at...I was actually planning to be an econometrician at one point in my life, but got distracted. You can take a model like the one in my paper and go in a fairly straightforward way to empirical work. Add some aggregate shocks and solve a few problems involving matching what is in the model with the data, and it's not a big deal. Any decent economist could do it, given the inclination. I can understand, though, that playing with New Keynesian models has its attractions. In spite of what you say, the work isn't hard. The technology for solving the models is well-developed, there is ample software available to help you out, and a there are many like-minded people who will referee your papers and get them into journals. That's the easy route.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64946055461448318822011-02-05T07:50:24.740-08:002011-02-05T07:50:24.740-08:001. Everyone is eagerly anticipating your empirical...1. Everyone is eagerly anticipating your empirical work.<br />2. I agree that debating theory is not a waste of time - it's a useful warm up for empirical work. <br />3. What specific empirical work in the new Monetarist lit are you referring to? I do not of a paper of Randy Wright which land up showing inflation can reduce output. When all is said the mechanism is the same as Cooley and Hansen CIA model of 20 years ago? Is that the big empirical victory for `deep' models?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51515025091019146372011-02-04T15:37:37.855-08:002011-02-04T15:37:37.855-08:001. The quantitative work is around the corner.
2. ...1. The quantitative work is around the corner.<br />2. Debating the theory is certainly not a waste of time.<br />3. Don't tell me Keynesians are the only ones doing serious empirical work. That's not true.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-23658144102071251262011-02-02T15:50:39.239-08:002011-02-02T15:50:39.239-08:00Professor Williamson:
I looked at the paper http...Professor Williamson:<br /><br />I looked at the paper http://www.artsci.wustl.edu/~swilliam/papers/intermed09-10.pdf that you cited in one of your responses.<br /><br />Very interesting and elegant. But as far as I can tell you don't provide any empirical support for the mechanisms that are proposed in the model.<br /><br />I am struck by the fact that you and other types that you tend to cite approvingly always argue on a priori methodological grounds.<br />The guys you always criticize, particularly the new Keynesians, actually roll up their sleeves and show how their models do when they confront the data.<br /><br />Doesn't it take a quantitative modelto beat a quantitative model? <br /><br />Everything else is debating how many angels can dance on a pin.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72431735208594938952011-02-02T14:50:59.662-08:002011-02-02T14:50:59.662-08:00A model economy is a system of equations derived f...A model economy is a system of equations derived from optimizing behavior by economic agents subject to various constraints. <br /><br />The equations in this system are interdependent, so exogenous shocks, say an exogenous government spending shock, eventually will affect all equations when the new general equilibrium is reached. <br /><br />The exact general equilibrium can be defined in numerous ways, such as: prices adjust to make sure that all markets clear (... and all constraints are satisfied).<br /><br />Everything changes, not just consumption and investment demand.<br /><br />KPAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62303021951198180272011-02-02T13:48:42.782-08:002011-02-02T13:48:42.782-08:00So, suppose you have a view of the world where mar...So, suppose you have a view of the world where markets don't clear, i.e., you get a lot of people who want to sell stuff at the going price but cannot find buyers (or vice versa) Then, for some reason, everyone wakes up in the morning and decides they are going to DEMAND goods rather than just keep their money in the bank. They will go to stores to buy goods, firms will commission new investment projects etc. Then, so long as the markets where demand increases are in a state where they would be willing to sell more stuff at the going price if only they could find buyers, they will sell more stuff and, if they are short of inventories, may want to increase output employment etc.<br /><br />Note that in this view of the world it is perfectly appropriate to speak of aggregate demand. It is something that has to do with how much people collectively *want* goods rather than something to do with their willingness or ability to produce goods. <br /><br />-RVAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-30642008168309798922011-02-02T11:15:34.013-08:002011-02-02T11:15:34.013-08:001. No, for micro partial equilibrium, demand and s...1. No, for micro partial equilibrium, demand and supply is fine. That works.<br /><br />2. "It seems to me that using the AD/AS terminiolgy is extremely useful if you view the economy the way he does."<br /><br />It's not "if." He views the economy the way he does because his macro training was essentially AD/AS.<br /><br />3. "...if you view things from a RBC perspective..."<br /><br />No, you're missing the point. This has nothing to do with RBC or government is good vs. government is bad.<br /><br />4. If trying to promote better ideas is dismissive, patronizing, or arrogant, then I guess I would be all three.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-57543712621839033912011-02-02T10:18:27.441-08:002011-02-02T10:18:27.441-08:00You could make a very similar argument regarding m...You could make a very similar argument regarding market supply and demand in a micro context. I wonder if you have the same aversion to that terminology, e.g. "a rise in demand for oil" doesn't tell us if this is due to a change in preferences, incomes etc.<br /><br />Krugman favours a certain set of policies including low interest rates, QE, deficit spending, increased government purchases, increased unemployment benefits and higher exports, which are traditionally classified as part of aggregate demand. Indeed, he wants them because he believes they will stimulate demand. He is against cutting taxes to increase incentives to find work or expand business, deregulation etc. He does not believe the recession is due to changes in productivity etc. In other words, he does not believe that issues that are normally classified as affecting aggregate supply are important. It seems to me that using the AD/AS terminiolgy is extremely useful if you view the economy the way he does. <br /><br />At the other extreme, I would agree that if you view things from a RBC perspective the terminology is pretty useless, except perhaps when communicating with a lay audience. For New Keynesians, I would say the terminology is potentially useful, potentiall misleading. But being dismissive and patronizing about people using standard economic concepts is pedantic a best and arrogant at worst. Now, Krugman is consistently patronizing and arrogant, but two wrongs don't make a right.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-63672428905174150722011-02-02T09:18:22.089-08:002011-02-02T09:18:22.089-08:00When we write down a general equilibrium model, we...When we write down a general equilibrium model, we first specify the environment: the economic agents who live in this fictitious world, the goods and services they consume, endowments, and the available technology. We also need to specify who knows what, and possibly the technology available for observing things that would otherwise not be observed. Then we need to specify an equilibrium concept. Every serious macroeconomic model used today has those features - New Keynesian, old RBC, heterogeneous-agent incomplete-markets, Lagos-Wright monetary exchange, whatever. If you want the model to generate business cycles, there are two ways to go about. Some models (e.g. New Keynesian and old RBC) have a unique equilibrium, and we can get aggregate fluctuations with exogenous stochastic shocks. Some other models (coordination failure models, for example) have multiple equilibria. Sometimes these models have equilibria where there are fluctuations that are driven by extraneous uncertainty (sunspot equilibria). There are various roles for government policy that come out of these models. In standard flexible price models we can think about credit frictions and government debt policies, and optimal taxation. In New Keynesian models we can think about some nonneutralities of money, price distortions, and how those distortions can be mitigated by monetary policy. In coordination failure models we can think about how policies can kill off bad equilibria. Using the words "aggregate demand" is not useful in understanding what those models have to do with reality and what they have to say about how we should conduct policy. You and other people use the words "aggregate demand" and "aggregate supply" because someone long ago thought that would be a useful shortcut in getting some ideas across to undergraduates. Unfortunately, this sometimes requires that those students unlearn some things. Apparently this unlearning is hard for you. Aggregate demand is a crutch, and the sooner you throw it away, the better off you will be.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-77926256541166133592011-02-02T08:11:19.016-08:002011-02-02T08:11:19.016-08:00What do you mean by "general equilibrium"...<i>What do you mean by "general equilibrium"? Walrasian equilibrium with all markets clearing?</i><br /><br />I mean an equilibrium (i.e., a state of rest, no tendency to change) for the whole economy, rather than just one particular market, as in partial equilibrium. The whole point of the Keynesian cross model is that the economy can get stuck in a bad, high-unemployment equilibrium, such that it will not return to full employment without some exogenous change (such as an increase in government purchases).<br /><br />If market clearing is necessary for equilibrium, then New Keynesian models don't qualify either, because prices are assumed not to change to clear each market. In fact, if you want to be a purist then any model with monopolistic firms is not in equilibrium because the monopolist ensures that Supply < Demand.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2137317423420045522011-02-02T04:59:31.693-08:002011-02-02T04:59:31.693-08:00"all macroeconomics is general equilibrium, i..."all macroeconomics is general equilibrium, including the Keynesian cross."<br /><br />What do you mean by "general equilibrium"? Walrasian equilibrium with all markets clearing? If so, then the Keynesian cross is not necessarily in general equilibrium.<br /><br />-RVAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20094663691189652142011-02-02T04:42:21.023-08:002011-02-02T04:42:21.023-08:00That doesn't make it right of course. What'...<i>That doesn't make it right of course. What's interesting is how hard it is to stomp out a bad idea in economics.</i><br /><br />It's not a question of right or wrong, it's a question of using phrases that have well-defined, informative meaning to people who know a little economics. True enough, one can split hairs about the distinction between the supply side and the demand side, and it's arguably preferable to avoid such terminology in a technical context (although I think describing New Keynesian models in terms of aggregate demand actually clarifies things greatly) but if Krugman's greatest failing was speaking in terms of aggregate demand his blog would be a great deal more informative. In this case, Krugman was guilty of a classic straw-man argument, since the majority of academics and policy-makers <b>do</b> believe the demand-side matters. What Krugman seems to object to is that a few people question this orthodoxy, and many others don't agree with his policy conclusions.<br /><br /><i>You think Keynes is dead and gone, then someone digs him up, dresses him up in a tuxedo, and brings him to dinner.</i><br /><br />I don't know why you would think Keynes was dead and gone when so many prominent economists describe themselves as New Keynesian or post Keynesian. In any case, the idea of a shortfall in aggregate demand isn't limited to Keynesians, as I said, the Lucas misperceptions story is really a story of why changes in aggregate demand may affect output and employment, and Monetarists blame a shortfall in aggregate demand (due to fall in the money supply) as the cause of recessions and, indeed, the Great Depression itself. What I don't know, is whether aggregate demand is important in the New Monetarist paradigm. I would assume that it is, but perhaps you can enlighten me. <br /><br />PS I forgot to mention before, but in response to your comment "we can think in general equilibrium terms": all macroeconomics is general equilibrium, including the Keynesian cross. Perhaps you meant to say <i>dynamic</i> general equilibrium?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-45471058511822344082011-02-01T14:11:50.289-08:002011-02-01T14:11:50.289-08:00''To make a good case that Old Keynesian f...''To make a good case that Old Keynesian forces matter for recent history, the Old Keynesians should be showing us direct evidence of the sticky wages and prices, as they relate to the current state of the economy.''<br /><br />Why is the burden of truth on showing that prices and wages do not conform to market clearing? Market clearing prices and wages are a single vector out of a large continuous space of possibilities. Perhaps the burden of the proof should be on showing that prices and wages are indeed such that markets clear?<br /><br />And if markets don't clear, then you have rationing or gluts. Isn't that a good, simple way to explain unemployment?<br /><br />- RVAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55956815361231597492011-02-01T08:11:25.358-08:002011-02-01T08:11:25.358-08:00"it's standard economic terminology."..."it's standard economic terminology."<br /><br />That doesn't make it right of course. What's interesting is how hard it is to stomp out a bad idea in economics. You think Keynes is dead and gone, then someone digs him up, dresses him up in a tuxedo, and brings him to dinner.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-92219358528123945102011-02-01T08:11:01.788-08:002011-02-01T08:11:01.788-08:00I've always some problems to think in GE terms...I've always some problems to think in GE terms. Never understood the concept. Different markets use different time frames which make it impossible to reach any kind of General Equilibrium. Markets are connected, but in a very imperfect way.<br /><br />On the other hand - just look at the 2008 international trade statistics, the inventory statistics, the National Accounts of that year - that's what a shortfall in demand looks like. <br /><br />And and Austrian version of 'Okun's law'is a very good way to explain why the labor market is not reaching equilibrium: increasing productivity is, again and again, surprising companies who aks prices wich are to high and therefore making unexpected profits while at the same time not using all capacity and labor available - a surprise not ofset by for instance suddenly increasing exports of increasing government demand. <br /><br />So, forget about the GE fairytaleAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55131295043578886352011-01-31T09:38:52.278-08:002011-01-31T09:38:52.278-08:00But it's not simpler. It's actually mislea...<i>But it's not simpler. It's actually misleading, and fundamentally confusing.</i><br /><br />Well, you may find it confusing but it's standard economic terminology. Personally, I don't like the output gap terminology, but I woudn't claim it was devoid of meaning.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-25329587554529035772011-01-31T08:34:53.040-08:002011-01-31T08:34:53.040-08:00"But if it's simpler to express ideas usi..."But if it's simpler to express ideas using basic, Econ 101, terminology, than why not do so?"<br /><br />But it's not simpler. It's actually misleading, and fundamentally confusing.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-19697270920172412752011-01-31T08:29:53.801-08:002011-01-31T08:29:53.801-08:00It is impossible to observe demand deficiency, whi...It is impossible to observe demand deficiency, which is an object only defined internally to a model. If your theory is bad, your definition is bad.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-87302043515154673822011-01-31T08:24:55.650-08:002011-01-31T08:24:55.650-08:00But we're grownups. We can actually think in g...<i> But we're grownups. We can actually think in general equilibrium terms. </i><br /><br />Well, yes, we can do. But if it's simpler to express ideas using basic, Econ 101, terminology, than why not do so? Especially if one is addressing a lay audience, as Krugman is. If output and employment are below their natural levels because prices are too high, then it seems reasonable to me to describe this as a shortfall in aggregate demand, rather than obfuscating matters by digressing into the various theories as to why this may or may not be the case.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36253686282569967852011-01-31T07:15:19.976-08:002011-01-31T07:15:19.976-08:00You're giving me an Econ 101 textbook story. A...You're giving me an Econ 101 textbook story. As you say "we classify things this way..." to make it seem easy for a freshman, after you have given him/her only one tool: two curves, one called supply (slopes up), one called demand (slopes down). But we're grownups. We can actually think in general equilibrium terms.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com