Roger Farmer has posted an open letter to Paul Krugman.
Farmer is a Keynesian, but he has his own unique view of what that means, and clearly he thinks he has differences with Krugman. Roger thinks about Keynesian ideas in terms of indeterminacy. You can explore those ideas on his website.
Farmer is a cool cat! I find his belief function an interesting alternative/addition (in terms of achieving consistency) to Rational Expectations.ReplyDelete
You know, it is depressing that economists (recent examples shall remain unnamed) gain fame only after they have nearly exhausted their intellectual contributions, while those who continue to produce superb scholarly work are hardly ever solicited by the media to present their ideas.
I find Farmer's work, and yours, path-breaking in terms of understanding what the heck happened. Please Steve, postpone your retirement as much as you can-your recent reference to Bob Dylan has me worried! :)
Well, hopefully retirement is a long way off. Now what did I do with that note I pin to my shirt so people will send me home when I get lost...Delete
This is a pretty odd open letter. I was expecting something more like this:ReplyDelete
I guess odd is in the eye of the beholder.Delete
As Ram says, it's odd. I won't be paying $5 for a paper that says the Natural Rate Hypothesis is past its sell-by date. If the aim is to get Krugman to publicise Farmer there's not much hope. Basically Krugman highlights two kinds of people: comrades-in-arms who present ideas similar to his own, and austerians whose ideas he wants to debunk. Like lots of economists, Farmer is not a member of either set.ReplyDelete
Don't forget the ideas of straw men. I haven't read Farmer's paper, but I'm guessing that he means that, if the world is one where there are multiple "Keynesian" steady states, then the notion of a unique "natural rate of unemployment" has to go out the window. On another note, it would be hard to find anyone who works seriously on search and unemployment talking about "natural rates." To a search theorist, there are many factors that are important in determining the unemployment rate. Some of those factors have a lot of persistence, and some don't. The natural rate is not a very useful concept, when you model the labor market in a productive way.Delete
Yes, well said. However, I am still not convinced that different "beliefs" lead to different labor market equilibria (permanent changes) rather than deviations from equilibria determined by more structural factors. To put it differently, would Wile E. Koyote continue to walk on air had he not looked down, or did his not looking down simply delay the inevitable?Delete
Nevertheless, these are ideas worth exploring!
"...I am still not convinced that different "beliefs" lead to different labor market equilibria..."Delete
I'm not either. It's not clear this is a good explanation for the fluctuations we see.
The big difference is between one steady state (or a small finite number) and a continuum of them. The natural rate makes sense (at least locally) in case of a finite small number. It makes no sense when there is a continuum. Thats where parameterizing beliefs helps -- it introduces animal spirits as a fundamental.Delete
Here is an open linkDelete
Roger Farmer had a guest post at Crooked Timber some time back explaining his proposal of "qualitative easing", which sounded to me like adding the features monetarists hate about fiscal policy to monetary policy.ReplyDelete
His unique assumption that you can't buy financial assets before you're born is obviously true though.
I saw one of his papers at this conference:Delete
The paper's called "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work in the Real World"
I think that's the same idea as in the crooked timber post. I thought there wasn't much new in the paper - and it's really not about the efficient markets hypothesis, as I understand it.
All of the previous sunspots literature works by constructing randomizations around an indeterminate steady state. Our inefficient markets paper constructs sunspot fluctuations around a unique determinate steady state. Thats pretty startling when you start to think about it. It implies that sunspot equilibria are much more prevalent than anyone had realized.
In some sense easier to construct in theory, but does that mean we're more convinced that sunspots give us a a good explanation for what we see in the data?Delete
"His unique assumption that you can't buy financial assets before you're born is obviously true though."ReplyDelete
Yes, check some of its implications in Chapter 10 of Macroeconomics, fifth edition, By Stephen D. Williamson. Sorry Steve, I just couldn't resist. :)
That's 1990s Farmer, for undergrads.Delete
I know. Having recently adopted your book for the fall semester, and being pleasantly surprised to see that you talk about it (the only undergrad Macro textbook I know of that covers this in detail) I thought I should do some advertising.Delete
Excellent. I never turn down free advertising.Delete