Monday, October 10, 2011

Krugman is Confused

I wrote about the 2011 Nobel prize that went to Sargent and Sims, then read what Krugman has to say.

If you have been reading Krugman, you know that he thinks the IS-LM model is great, that bad economists are the ones who use sophisticated mathematics, and that we are in a Dark Age of Macroeconomics that began in the 1970s in "freshwater schools" like the University of Minnesota. Are those views consistent with this?
...before Sargent and Sims came along, econometrics consisted largely of estimating models you had no good reason to believe based on identifying assumptions (if you don’t already know, you don’t want to) that lacked credibility. S and S played a key role in developing methods that let the data speak instead.
Krugman does not seem to understand that the "incredible identifying assumptions" came from Old Keynesian IS-LM economics. 1970s rational expectations macroeconometrics, developed by Sargent and Sims, tells you that the identifying assumptions that went into expanded IS-LM estimated models like the FRB/MIT/Penn model, were incredible, and that we should throw those models out.


  1. Come on, give him a break. I would be happy if all his posts were as honest as this one

  2. Well, you can see him struggling there. One of the recipients is from his department, so he can't dump on the choice. But he doesn't want to give credit to "freshwater macro," as that is not in line with his narrative. He tries to find a way out by arguing that it's not really freshwater. Of course, the two recipients are as solid freshwater as you get - what ties them together is their early careers at Minnesota, when the term "freshwater" actually meant something.

  3. It is a bit odd to give credit to NYU and Princeton if the prize was for work done at other institutions, but it didn't really seem like he was dismissing freshwater in that specific post. He said the recipients had a freshwater background, but the techniques have spread far beyond. When work spreads beyond an initial group to become adopted by the mainstream, that's success and a credit to the folks that created it. Just hard to reconcile that evaluation with proclamations of a "Dark Age".

  4. Here's a question:

    While this is undoubtedly a prize for "Minnesota Macro," has the actual department at Minnesota moved away from the tradition embodied by the work of S&S cited by the prize committee? Where are the time series people there? Where are the structural macroeconometrics people?


  5. wonks,

    Actually it's good to see that Krugman understands that part. The ideas of Lucas, Sargent, Sims, Wallace, etc., have been widely adopted, in some cases by people Krugman might think of as "saltwater." Saltwater and freshwater are terms that are not of much use any more.

    Agent Prov.,

    Yes, Minnesota has changed. Prescott pushed the department in a particular direction that was not friendly to the econometricians, and the econometricians were not happy about it.

  6. When has Krugman ever supported Old Keynesian econometric models? He's always favored creating the simplest models possible in hopes to build intuition.

  7. The comments on Krugman's piece would be embarrassing to a group of third-graders. But not I guess to the commenters themselves.

  8. Charlie,

    True, he seems to be pushing the view that everyone else should use the things he knows that help him write his blog.