tag:blogger.com,1999:blog-2499715909956774229.post6286259997368463791..comments2022-11-22T10:03:29.352-08:00Comments on Stephen Williamson: New Monetarist Economics: Fringe EconomicsStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger46125tag:blogger.com,1999:blog-2499715909956774229.post-26980080148125337372010-10-19T09:51:14.668-07:002010-10-19T09:51:14.668-07:00Fringie? You sure are arrogant and rude.Fringie? You sure are arrogant and rude.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88755039875903972782010-10-12T14:56:43.394-07:002010-10-12T14:56:43.394-07:00Briefly. Start with a RBC mode. There are two ways...Briefly. Start with a RBC mode. There are two ways to introduce monetary exchange:<br /><br />1. The proper way. Explicitly introduce trading frictions. (Steve's way).<br /><br />2. The quick and dirty way. Assume all exchanges are infinitely costly, except exchanges of goods for money, which have zero transactions costs. With n goods, there are potentially n(n-1)/2 markets in a barter economy. You just assume there are only n-1 markets, in each of which money is traded against one other good.<br /><br />There's nothing wrong with the Q&D way, but you must be explicit about it. The New Keynesians aren't explicit. And it matters. For example, take a recession in an NK model. every firm wants to sell more goods, but buyers don't want to buy more. Why don't firms simply barter goods with each other? It's ruled out by assumption, but that assumption is never stated explicitly. <br /><br />If prices are perfectly flexible, it doesn't matter if those barter markets are "missing". So we don't need to see the equilibrium conditions in those missing markets. But if prices are sticky, it does matter. If there's an excess supply of apples for money, and an excess supply of bananas for money, apple growers would want to do direct barter trades with banana growers.<br /><br />If we allowed barter for example, then Steve's original interpretation of NK models (there's a relative price distortion and a relative output distortion, but nothing more), would be precisely correct.<br /><br />And the NKs are to blame for this, because they never make explicitly clear that they are ruling out non-monetary trade. Some of them even miss the fact that this model only makes sense with money.<br /><br />For example, suppose we had a barter version of the same economy, and had the government peg the real interest rate too high by pro-usury laws. That would not cause a recession. It would simply cause an excess supply of loans.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-53328367045184881802010-10-12T12:19:02.174-07:002010-10-12T12:19:02.174-07:00"The “disequilibrium” analysis is also not ty..."The “disequilibrium” analysis is also not typically part of the model."<br /><br />Yes and no. It's there, just implicitly. Suppose we asked "what is the labour demand curve in this model?" In the long-run, when prices are flexible, the labour demand curve is the marginal revenue product curve. But in the short-run, when firms cannot adjust prices and so sales are exogenous wrt the firm, the labour demand curve is the inverse of the production function, provided real wages are less than or equal to marginal revenue product. This is exactly the same as the old Barro-Grossman 1971 disequilibrium model, except we replace "value marginal product" with "marginal revenue product", because of imperfect competition. In other words, when you solve for employment from short-run output, by using the production function, you are implicitly using a constrained demand curve. It's just not explicit. But if you ever asked the question "what would happen in the short-run if wages too were sticky", or some similar question, you would be forced to make this explicit.<br /><br />"The conditions are all the same with two exceptions: the New Keynesian model has a price setting condition that is not present in the RBC model (this is the New Keynesian Phillips Curve or NKPC), and the non-stochastic steady state occurs at a point where price exceeds marginal cost (the steady state desired markup)."<br /><br />The markup due to imperfect competition is not an issue here. An RBC model with imperfect competition is (usually, unless there's multiple equilibrium or something) is still an RBC model. Output is suboptimal, but money is (at least approximately) irrelevant, and any fluctuations caused by taste or technology shocks may be (at least roughly) efficient.<br /><br />It's the sticky prices that are the biggie.<br /><br />For starters, if prices were perfectly flexible, you could not have a central bank setting the nominal interest rate as a policy instrument. There would be no nominal anchor. Start in one equilibrium time-path, then double all prices along that time-path, and you are still in equilibrium. The price level would implode or explode if the central bank made the tiniest mistake.<br /><br />Furthermore, if prices were perfectly flexible, the real side of the economy would determine the real interest rate, independently of monetary policy, rather than the central bank setting the real interest rate, as it can do in the short run given sticky prices. This means that even though the equations describing the equilibrium conditions would look very similar, the chain of causation would be totally different. (This is getting back to Paul Krugman, and the kerfuffle over what Narayana Kocherlakota said.)<br /><br />I want to make one more fundamental point, about equilibrium conditions in a barter vs a monetary exchange economy. Right up Steve's street (I think). But I gotta teach my class. Later.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8376886177678130322010-10-12T12:18:31.662-07:002010-10-12T12:18:31.662-07:00Anonymous: (thanks to both you and Steve for keepi...Anonymous: (thanks to both you and Steve for keeping this going, by the way).<br /><br />"It sounds like you are simply dissatisfied with the New Keynesian model itself, not Steve’s interpretation. The demand externalities that you have in mind (paradox of thrift effects for instance) are just not an important part of the model. Perhaps this is a shortcoming but as to whether the effect is present, it’s simply not there. "<br /><br />I am dissatisfied with the model, but I'm more dissatisfied with Steve's interpretation of it.<br /><br />There is a paradox of thrift in this model. <br /><br />Start in full equilibrium. Ignore investment for simplicity. Now assume there's a drop in time preference (people are more patient, so that parameter Beta changes). The natural rate of interest falls. Suppose the central bank fails to see that the natural rate has fallen, and keeps the nominal rate of interest the same for one or more periods. The Consumption-Euler equation tells us that there must be a fall in current consumption, and so a recession. And the Calvo (or whatever) Phillips Curve tells us that will cause disinflation. This is exactly the same result (qualitatively) you would get in an ISLM+Phillips Curve model.<br /><br />"The “yeoman farmer” interpretation doesn’t change the model."<br /><br />Agreed. It was just my way of showing that the underlying cause of recessions was not some sort of failure in the labour market, or distortion in real wages. Any change in real wages is a consequence of aggregate fluctuations, not a cause.<br /><br />(Comment too long. Cutting here.)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35436994373063879152010-10-12T10:55:35.217-07:002010-10-12T10:55:35.217-07:00Steve: there are two versions of the Old Keynesian...Steve: there are two versions of the Old Keynesian model: the sticky wage version and the sticky price version. The sticky price version has exactly the same procyclical real wage as in the New Keynesian model. New Keynesians (typically) chose to go with the sticky price version.<br /><br />But the point I was making (in response to Anonymous) is that if prices are sticky it doesn't (much) matter if wages are sticky or not. You get the same output and employment fluctuations in response to bad monetary policy either way.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55234599103832692892010-10-12T10:35:52.177-07:002010-10-12T10:35:52.177-07:00Nick,
It sounds like you are simply dissatisfied...Nick, <br /><br />It sounds like you are simply dissatisfied with the New Keynesian model itself, not Steve’s interpretation. The demand externalities that you have in mind (paradox of thrift effects for instance) are just not an important part of the model. Perhaps this is a shortcoming but as to whether the effect is present, it’s simply not there. <br /><br />The “yeoman farmer” interpretation doesn’t change the model. The incentive of the producers the same – when demand rises, prices of the other goods are unchanged and the yeoman farmer works more because he or she can purchase more goods at lower prices (his or her effective real wage has gone up). <br /><br />A fixed real wage is not typically included in the model. Fixed real or nominal wages can be added but still won’t undo the underlying structure which is fundamentally neoclassical (one difference though is that with fixed real or nominal wages, imperfect competition must be introduced in the labor supply curve). <br /><br />The “disequilibrium” analysis is also not typically part of the model. The New Keynesian model is set up and solved with conventional techniques. I imagine that you could add disequilibrium stuff though I have to admit I have no training or familiarity with such techniques so I can’t really say how that would change the framework. <br /><br />The mathematical analysis and interpretation of the model is fairly straightforward. One way to see what Steve is saying would be to simply list the equilibrium conditions for the standard RBC model and the New Keynesian model side by side. The conditions are all the same with two exceptions: the New Keynesian model has a price setting condition that is not present in the RBC model (this is the New Keynesian Phillips Curve or NKPC), and the non-stochastic steady state occurs at a point where price exceeds marginal cost (the steady state desired markup). These two mathematical conditions are exactly what Steve pointed to originally: imperfect price adjustment and monopolistic competition. All of the other conditions are the same.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62934918072381607572010-10-12T06:45:12.865-07:002010-10-12T06:45:12.865-07:00Nick,
You can't disagree with anonymous. He/s...Nick,<br /><br />You can't disagree with anonymous. He/she is just describing how these models work. You can't keep insisting the sky is green when we can all see it is blue. This gives you an important dimension on which a New Keynesian framework is very different from an Old Keynesian static sticky-wage AD/AS model. In the old models, a monetary expansion increases the price level, the real wage falls, and firms hire more workers (moving down the labor demand curve). In a New Keynesian model, a reduction in the nominal interest rate target is coupled with an increase in the real wage, which is required to induce workers to supply more labor.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-837303540094890072010-10-11T19:44:43.797-07:002010-10-11T19:44:43.797-07:00Or, put it this way, Anonymous: sure, the real wag...Or, put it this way, Anonymous: sure, the real wage is "wrong" when monetary policy is "bad", and causes aggregate fluctuations. But that's just a *symptom* of the problem, not a cause of the problem. The problem is a deficiency of aggregate demand in a monetary exchange economy, where direct barter of labour for goods is ruled out by (implicit) assumption. Even if you fix the real wage at the "right" level, but law, it won't fix the problem, and won't cause output to stay at the natural rate when monetary policy is bad.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54462715128286560242010-10-11T18:52:09.513-07:002010-10-11T18:52:09.513-07:00Anonymous: You are giving a very different interpr...Anonymous: You are giving a very different interpretation than Steve. But I disagree with you too.<br /><br />The "relative prices" that Steve is talking about are the relative prices of different firms' outputs. If I interpret Steve correctly (and he has not said I am mistaken in this), he is saying that the welfare losses due to bad monetary policy are only due to those relative price distortions and the relative output distortions they cause. And those relative output distortions disappear if you drop the assumption of staggered (Calvo) price setting.<br /><br />Your interpretation of the New Keynesian models is very different from Steve's, because you are allowing that bad monetary policy can cause aggregate fluctuations in output and employment, not just relative output fluctuations. And your results would not be (materially) affected if we dropped the Calvo staggered price setting, and assumed synchronised price setting instead.<br /><br />Your interpretation is more standard, and much more reasonable. But I still think you are wrong. In fact, you are wrong. Let me try to explain why.<br /><br />First, we can eliminate the labour market altogether, by assuming that each firm has one worker-owner (this is Larry Ball's old "yeoman farmer" metaphor), and the fluctuations in output and employment are exactly the same. Essentially, it makes no difference whether the workers are self-employed, or are hired by the firm in a competitive labour market.<br /><br />Second, try this thought experiment. Start in equilibrium at the natural rate. Now assume that the real wage is fixed by law (fully indexed minimum wage set at the current equilibrium wage). Now suppose bad monetary policy causes aggregate demand to fall. And nominal output prices are sticky, so firms' sales and output fall, and employment falls too, since it is linked to output via the production function.<br /><br />So we have a fall in aggregate output and employment even though the real wage stays fixed at the "right" (long-run equilibrium) level.<br /><br />And if the minimum wage law is suddenly abolished, so the nominal wage and real wage suddenly drops to clear the labour market, absolutely nothing happens to output and employment (except, over times, as firms cut prices more quickly now that their marginal costs have suddenly fallen). We have merely converted involuntary unemployment into voluntary unemployment, by dropping the wage down onto the labour supply curve.<br /><br />If you want the theoretical underpinnings for this result, you have to go back to disequilibrium macro of the late 1960's and early 1970's, where they distinguished between the "notional" labour demand curve (which assumes that firms are not sales-constrained, and is the marginal revenue product of labour curve), and the "constrained" labour demand curve (which takes into account the fact that firms are sales-constrained, and so only hire that quantity of labour they need to produce the goods they are able to sell).<br /><br />Look, Anonymous, your intuition is not unreasonable. You are not hopelessly wrong; just wrong. Many economists would think of the New Keynesian model the way you think of it. But it's wrong.<br /><br />The way this comment thread has gone, unfortunately, has convinced me that Paul Krugman is right. There is a Dark Age. Economists have forgotten what we used to know. And they don't understand their own maths.<br /><br />I'm a burned out ex-university administrator. Steve is a *much* more accomplished researcher in money/macro than me. You very possibly are too, Anonymous; your comment shows this. But you guys just don't have a clue. You don't understand what's going on in this very mainstream model. And I'm talking about New Keynesians nearly as much as "New Monetarists".Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-10057598690831476872010-10-11T17:50:27.874-07:002010-10-11T17:50:27.874-07:00Nick,
Actually Steve is right. Essentially all ...Nick, <br /><br />Actually Steve is right. Essentially all New Keynesian models are built on an RBC substructure. The main differences are (as Steve said) (1) monopolistic competition and (2) imperfect price adjustment. The sluggish price adjustment can take many forms (Taylor, Calvo, Rotemberg quadratic costs, 1-period ahead price setting, etc.) and in the end the basic implications are qualitatively the same. <br /><br />The pertinent “relative price” in the basic model is actually the real wage. After a demand shock (or a monetary expansion) firms seek to hire more labor at the given nominal wage. This bids up the nominal wage but the aggregate price doesn’t keep pace and thus the real wage rises. The higher real wage in turn elicits more labor supply from the households. This is how the baseline model works and is why so many New Keynesian researchers cast the problem in terms of a countercyclical markup. The markup is the ratio of the price to nominal marginal cost which in the standard model with linear production is just the nominal wage. If the markup is countercyclical then the New Keynesian framework has some hope since it is exactly this relative price which is distorted by demand/monetary shocks. If the markup is procyclical then either the model has to be abandoned or modified (e.g., with wage rigidity instead of price rigidity). <br /><br />Either way, the relative price movements (and all of the incentive effects which go with it) are entirely neoclassical. This substructure (the RBC model) may not be an attractive feature of the model but it is what the New Keynesian models are all built on.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79484834907145269792010-10-11T13:18:22.241-07:002010-10-11T13:18:22.241-07:00Yes indeed. You should talk to Mike Woodford about...Yes indeed. You should talk to Mike Woodford about that.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18147182806133159122010-10-11T12:53:27.420-07:002010-10-11T12:53:27.420-07:00But in a barter economy, of course, the idea that ...But in a barter economy, of course, the idea that there's a central bank setting a nominal interest rate makes no sense anyhow.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82615761031062905642010-10-11T12:47:38.985-07:002010-10-11T12:47:38.985-07:00We really do disagree.
Let me try the intuition t...We really do disagree.<br /><br />Let me try the intuition this way:<br /><br />Let's drop the (silly) Calvo pricing assumption, and replace it with the (equally silly) assumption that firms have quadratic costs of adjusting their nominal prices. Let there be n firms each producing one flavour of ice cream. Each firm is run by a worker-owner, who gets utility from leisure, and who is also a consumer, with Dixit-Stiglitz preferences, so there's a taste for variety of flavours. Perfect symmetry, so all firms have identical production costs and demand curves, and price adjustment costs. So all firms always set the same price, whether or not the price adjustment costs are binding. Standard intertemporal preferences, so we get the standard consumption-Euler equation.<br /><br />A central bank sets a nominal interest rate, as a function of whatever.<br /><br />This model is identical to the standard Neo-Wicksellian/Woodfordian/New-Keynesian model, except: I've sawn off the labour market for simplicity; and I've replaced Calvo price adjustment with quadratic costs.<br /><br />So I have rigged the model so that relative prices are always equal to one, and are never wrong.<br /><br />Can this model have a recession, where output and employment falls below the natural rate, because of bad monetary policy, even though all relative prices are always "right"?<br /><br />I take it you would answer "no" (except for the labour wasted in adjusting prices)?<br /><br />I would answer "yes". Suppose the central bank sets the nominal interest rate too high for one period (and, for simplicity, assume it is common knowledge the bank will get it right next period, so the economy returns to the natural rate). Current consumption will fall relative to future consumption (even more so under rational expectations, since the recession will cause expected deflation and raise the real rate still further).<br /><br />Maybe I should blame Woodford. It's too easy to mistake the assumption of a "cashless" economy with a barter economy, rather than a pure credit monetary exchange economy. But I really think you have misunderstood his model. Maybe actually reading Interest and Prices carefully had negative value added.<br /><br />In a barter economy, of course, Say's Law applies. The underemployed ice cream producers simply resort to swapping each others' flavours.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-17801183895612361042010-10-11T11:19:39.701-07:002010-10-11T11:19:39.701-07:00Nick,
You could price any assets you want in that...Nick,<br /><br />You could price any assets you want in that framework. When you are away from the optimum, all those asset prices will be wrong. There's nothing special about the real rate. At the base of it though is that the relative prices of goods are out of whack. I'm not sure what we get out of thinking that some model we use is "like" an IS/LM model. I sometimes find partial equilibrium supply/demand stories useful for giving students intuition. Robert Hall, for example, is very good at this. However, if we all woke up tomorrow having forgotten that IS/LM existed, I don't think we would have lost anything.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8520825845946429472010-10-11T10:00:35.765-07:002010-10-11T10:00:35.765-07:00What's "wrong" in both examples is t...What's "wrong" in both examples is the real interest rate. Now, it's true that the real interest rate is a relative price -- the relative price of present vs future consumption -- but that's not the same as the relative price of one flavour of ice cream to another flavour of ice cream (which is the relative price I thought you were talking about).<br /><br />And again, it shares that feature with the ISLM. Assume the central bank sets a nominal interest rate, with the money supply perfectly elastic, and you get a horizontal LM curve. And if it sets too high a rate, relative to the natural rate (which is where the IS curve cuts "full employment", and the real interest rate is too high, you get a recession.<br /><br />Funny thing is, I actually agree with you that the Euler-equation "IS" is more different from the traditional IS than most New Keynesians think it is. But my reasons are very different from yours.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18350461145634527362010-10-11T08:54:11.840-07:002010-10-11T08:54:11.840-07:00In your first example, the central bank gets it wr...In your first example, the central bank gets it wrong, but it comes down to a problem of the relative prices being wrong. In the second case, they make an error and - guess what - they get the relative prices wrong. It's always the relative prices. You can like IS/LM or you can like Woodford. Woodford deliberately led people to believe he was doing IS/LM, but he's not.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15256996529752226132010-10-11T07:34:10.287-07:002010-10-11T07:34:10.287-07:00Steve: Ah! We do disagree (on some of this).
It&#...Steve: Ah! We do disagree (on some of this).<br /><br />It's not news to say that the job of monetary policy is to try (if possible) to keep the economy at the natural rate, which means (roughly) where it would be if prices were perfectly flexible. This idea pre-dates RBC and New Keynesianism. Old Keynesians would have described it slightly differently: something like using monetary policy to get a Keynesian economy to behave like a "Classical" (flexible price) one.<br /><br />But that doesn't make the economy Classical. It makes it an economy where good monetary policy matters for real output.<br /><br />If that's just a cow with a hat, I say it's some big hat. And it sure affects how the cow behaves.<br /><br />"In Woodford's cashless economy with Calvo pricing, inflation is costly because of relative price distortions. Monetary policy can fix the problem by giving price stability (so long as the zero lower bound on the nominal interest rate is not violated)."<br /><br />Agreed. And that result generally carries over into an economy with cash too, except for the shoe-leather cost of people economising on cash.<br /><br />"In the cashless model, the price level is irrelevant - only relative prices matter."<br /><br />Now the price-path *level* is irrelevant in a cashless economy. Precisely because it has no nominal anchor, like a fixed stock of cash. And the price-path level would be indeterminate, were it not for sticky prices and the central bank following some sort of Taylor Principle rule to make it determinate.<br /><br />But there are more ways for monetary policy to be bad than just choosing a non-zero target rate of inflation. Suppose the natural rate of interest falls, and the central bank does not observe it, and so does not drop the nominal rate, and so sets the nominal interest rate too high. The result is a recession. That recession is costly not just because relative prices are distorted, and so relative output across firms is distorted. It is costly because aggregate output falls.<br /><br />Or suppose the central bank suddenly decides to target a lower price level. The nominal price level cannot immediately fall to the new target. The nominal price level is too high relative to target. Again, the resulting recession is costly over and above any relative output distortions caused by relative price distortions due to non-synchronised price setting.<br /><br />And those results are just like the Old Keynesian ISLM model's.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50412363499038786962010-10-11T06:34:52.927-07:002010-10-11T06:34:52.927-07:00"Because if you take an RBC model, then add s..."Because if you take an RBC model, then add sticky nominal prices, the result (usually) is a model that is very much not an RBC model."<br /><br />A cow with a hat is still a cow. Typically, optimal monetary policy in a New Keynesian model reproduces the RBC equilibrium allocation - the right policy gives you the cow with no hat.<br /><br />"It's the stickiness of the *general level of nominal prices* that distorts aggregate output (unless monetary policy is exactly right)."<br /><br />Exactly wrong. You need to read "Interest and Prices." In Woodford's cashless economy with Calvo pricing, inflation is costly because of relative price distortions. Monetary policy can fix the problem by giving price stability (so long as the zero lower bound on the nominal interest rate is not violated). In the cashless model, the price level is irrelevant - only relative prices matter.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69391315831243411492010-10-11T02:49:08.026-07:002010-10-11T02:49:08.026-07:00Steve: if you are just talking about the historica...Steve: if you are just talking about the historical *origins* of the so-called New Keynesian IS curve, that's not something I would argue about. (Though if you simply replace the old Keynesian consumption function with Friedman's Permanent Income Hypothesis you get much the same thing). It sounded like you were saying something much more controversial.<br /><br />Because if you take an RBC model, then add sticky nominal prices, the result (usually) is a model that is very much not an RBC model. I read you as contradicting that.<br /><br />But what makes it a non-RBC model has very little to do with "The sticky prices give you relative price distortions that make the model amenable to doing standard welfare economics." It's not the *relative* price distortions that make it a Keynesian model. (Just have bunched rather than staggered price setting and you get rid of those distortions). It's the stickiness of the *general level of nominal prices* that distorts aggregate output (unless monetary policy is exactly right).Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11057523660221986532010-10-10T18:56:42.693-07:002010-10-10T18:56:42.693-07:00Nick:
Look at Chapter 3, section 1, page 143, whe...Nick:<br /><br />Look at Chapter 3, section 1, page 143, where he lays out "A Basic Sticky Price Model." Or you can read this early paper by Rotemberg and Woodford:<br /><br />http://ideas.repec.org/p/nbr/nberte/0233.html<br /><br />In Cooley's 1995 book Frontiers in Business Cycle Research, which summarizes the RBC literature (which is pretty much done by that time), there is a paper by Rotemberg and Woodford on imperfect competition in dynamic models. Shortly thereafter, Rotemberg, Woodford, and others are putting sticky prices into those models and linearizing to come up with 3-equation New Keynesian models ("IS curve," "Phillps curve," Taylor rule). By the time Clarida, Gali, and Gertler write their survey, they just write down the 3 equations, state that it is derived from an underlying optimizing model, and reference the derivations in other papers. The Genesis is clear - the thing evolves directly out of the RBC literature.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-86859012519032555342010-10-10T16:41:53.175-07:002010-10-10T16:41:53.175-07:00Yes. Not thoroughly. Are you saying Woodford says ...Yes. Not thoroughly. Are you saying Woodford says it *is* an RBC model? Even more fun. I get to argue with you *and* Woodford! It's lovely when people don't understand their own models!<br /><br />Don't try to bulldoze me in a literature review pissing contest though. I'm trying to check that you really believe that, and it wasn't just an off-the-cuff comment you hadn't really given much thought to. Or maybe you meant something quite different than I thought you did. If you want me to explain more why I think you are wrong I will do so. I would like you to explain more why you think you are right. Because I really don't understand why you would believe that about NK models.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7286257470573765462010-10-10T16:05:46.175-07:002010-10-10T16:05:46.175-07:00Nick,
"Sorry, but you are totally wrong here...Nick,<br /><br />"Sorry, but you are totally wrong here. It's certainly not an RBC model with monopolistic competition."<br /><br />Have you read "Interest and Prices?"Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-9832044267438479572010-10-10T15:58:25.345-07:002010-10-10T15:58:25.345-07:00Steve: "However, the underlying model is basi...Steve: "However, the underlying model is basically a Prescott real business cycle model with monopolistic competition. The sticky prices give you relative price distortions that make the model amenable to doing standard welfare economics."<br /><br />Sorry, but you are totally wrong here. It's certainly not an RBC model with monopolistic competition. The fact that both have an Euler equation doesn't make them the same. Bad monetary policy can cause aggregate fluctuations that are inefficient in the New Keynesian model. And this inefficiency has nothing to do with the relative price distortions that arise from staggered price setting, which are a secondary inefficiency; you get the same recession when all prices are set at the same time, so there are no relative price distortions.<br /><br />I'm trying to figure out why you think it's right, when it's so clearly (to me) wrong.<br /><br />And the best theory I can come up with is...it's the math wot dunnit! You see an Euler equation in both, and figure they must be basically the same (monop comp and relative price distortions aside).<br /><br />And I blame the New Keynesians too, for not making money explicit in the model, so it's not clear that the model only makes sense in a monetary exchange economy, where barter is too costly to do.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-62913066000182047752010-10-10T15:11:53.828-07:002010-10-10T15:11:53.828-07:00"If you can't explain your model in words..."If you can't explain your model in words, don't expect that I'm going to be impressed that your grad students can solve differential equations."<br /><br />Yes, I agree completely. If you like what Krugman does, that's fine too. But Krugman has another agenda, which is trying to convince people that modern macro is nonsense. You can see why I might have a problem with that.<br /><br />"How does your model - whatever it may be - compare with present trends and how does it work when considering the shock of the recent financial crisis. Please tell us."<br /><br />Read this and see if you like it.<br /><br />http://www.artsci.wustl.edu/~swilliam/papers/intermed09-10.pdf<br /><br />It has equations and words too.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-76361590748467294892010-10-10T10:29:21.516-07:002010-10-10T10:29:21.516-07:00Stephen,
Mathematical models help clarify our thi...Stephen,<br /><br />Mathematical models help clarify our thinking, but they should not be confused with the truth. You denigrate Krugman's modeling skills, but I give him credit for being able to state the basic assumptions of the models he employs in simple terms that add to understanding without resorting to mathematical mystification. I challenge you to do the same.<br />Economics is a behavioral science with a few accounting identities thrown in. If you can't explain your model in words, don't expect that I'm going to be impressed that your grad students can solve differential equations. Any science worth its salt spends most of its time trying to find the shortcomings of present models when compared to observation. How does your model - whatever it may be - compare with present trends and how does it work when considering the shock of the recent financial crisis. Please tell us.Garyhttps://www.blogger.com/profile/08580497879135994296noreply@blogger.com