Friday, January 10, 2014

Big Ideas in Macroeconomics

Some commenters have asked if there are books written by frontline macroeconomic researchers that make modern macro accessible for lay people. There is a new one out by Kartik Athreya at the Richmond Fed that is good reading.

74 comments:

  1. Looks good, I plan to buy it as I'd like the historical perspective.

    I don't know if you're aware but David Glasner believes that Greg Hill got to the bottom of what you're errors interests rates are-in their view.

    "Greg Hill has a terrific post on his blog, providing the coup de grace to Stephen Williamson’s attempt to show that the way to increase inflation is for the Fed to raise its Federal Funds rate target. Williamson’s problem, Hill points out is that he attempts to derive his results from relationships that exist in equilibrium. But equilibrium relationships in and of themselves are sterile. What we care about is how a system responds to some change that disturbs a pre-existing equilibrium."

    http://uneasymoney.com/2014/01/09/macroeconomic-science-and-meaningful-theorems/

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    1. Well, apparently some people don't know much economics.

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    2. The idea that Greg Hill has a terrific post on economics is hilarious.

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    4. Stephen, did you even read my post?

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    5. Nice post (http://www.the-human-predicament.com/2014/01/the-emperors-new-clothes-economists.html) Greg.

      I particularly liked that you pointed out that pretending that the economy is always in equilibrium is also "just a story". Most good economists, including neoclassical ones, are able to tell what is happening outside of equilibrium, they do not treat their models like the Truth but as a map that helps them find the path.
      But some people treat theoretical economics as "just maths" and these guys are horrible economists.

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    6. Greg,

      No, I just read the quote in the first comment. That was enough for me.

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  2. Stephen, the quote is not from my post.

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    1. Greg, regardless, you are misrepresenting Steve's model. In it, the equilibrium is not Walrasian, since there is a decentralized market. Therefore, I am not sure what Arrow-Debreu have to do with anything. If you are going to criticize something, should you not educate yourself on it first? (You probably can-the anonymous above is a lost cause).

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    2. CA, I don't think you read my post very carefully. I was responding to Stephen's point acknowledging that “the stories about convergence to competitive equilibrium - the Walrasian auctioneer, learning - are indeed just stories . . . [they] come from outside the model.” My point was that these "stories" won't really do the job, as Frank Hahn, Franklin Fisher, and others have shown. Of course you can wave a magic wand and say "there's no such thing as out-of-equilibrium behavior," or that it has no "meaning," but that's not very satisfying.

      People commenting on this page are constantly telling Stephen's critics (and I'm not always a critic) to "educate" themselves, etc. This is what happens when you think "your side" is doing "science" and the "other side" is doing "critical theory" (to borrow Stephen's phrase).

      Suppose you took a different tact. For example, you could read some of Frank Hahn's work and then you'd discover that he's addressing many points made by some of Stephen's heroes, including Robert Lucas and Thomas Sargent. Take a look at Hahn's "Macroeconomics and Equilibrium," I think you'll be glad you did.

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    3. Greg,

      I think you would benefit from reading Kartik's book (see his comments below). I did read your post, which is quite confused. It's hard to know where to start to get you on the right track, but the book will help, certainly.

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    4. Stephen,

      I've already ordered the book and expect to profit from it. I could agree with everything else you said, provided you put "not" in front of it.

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    5. Greg,

      I want to make clear that I have no problem with criticizing Stephen. I have a problem with the basis of the criticism so far.

      Here is what I disapprove of: People don't like the predictions of Steve's model, so they want discredit its results. However, they are unwilling to spend enough time to understand the model. So instead, they start a fishing expedition, for example by raising methodological issues about equilibrium, when in this regard Steve's model is no different than most other macroeconomic models, including New-Keynesian ones.

      So what is the proper way to go about it? By this point I have spend numerous hours reading and thinking about Steve's work. They are probably still not enough, especially since I am not a monetary theorist. And I am sure if I say something incorrect Steve will let me know it. But my understanding is that to figure out what is driving Steve's result you need to take into account how the following components of his model work together: 1) Inefficiencies arise only in the decentralized market (DM), as the centralized market (CM) is Walrasian. 2) Money is neutral in the CM 3) A corollary of 1 and 2 is that, if liquidity is scarce in the DM, any policy that results in a reallocation of money from the CM to the DM increases efficiency. Such policies include lower inflation and a higher interest rate.

      Now, maybe you think that there is something wrong here. For example, maybe you believe that there is no market in which money is neutral. Maybe you are concerned that government is not included as a buyer in the DM. What do you do? If you are smarter than I am, you write a model in which you change the environment, and see if the results change. While doing so, you keep citing Steve's work and building on his model, which keeps Steve happy even though you are being critical of his results. This is how science works. Throwing stones in the dark and hoping that you will get lucky is not the way to go about things. By the way, this criticism applies not just to you, but to DeLong, Glasner, and other critics.

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    6. This "educate yourself" nonsense is indeed plain ridiculous when it is uttered by people who do not see the elephant in the room: the tremendous methodological error of using equilibrium conditions without being able to tell how that equilibrium is reached which leads to a wrong result.

      If people like Williamson and the old, pre-enlightenment Kocherlakota look at the Fisher equation, assume that real rates are constant and then conclude that low nominal rates have to lead to low inflation they are merely showing that they do not even understand the very basics of the subject they are supposed to be experts in.

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    7. And if you had educated yourself you would know that in Steve's article the real rate of interest is not constant, as you accuse him of. It can take different values, depending on the situation, within an interval bounded by the inverse of the rate of inflation and the rate of time preference, and can even be forever negative (e.g, in a liquidity trap). Moreover, there is, in fact, an explanation of how equilibrium is reached, and it is the same explanation, like it or not, as in every other modern macro model, including New-Keynesian models: rational expectations. So please, keep commenting, you keep making the case for more education stronger.

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    8. I refer to the methodological error, not the flawed paper. Williamson showed this dubiosu Fisher equation logic back in the days when he defended the old Kocherlakota.

      Do yourself a favour and start reading an Econ 101 textbook to learn how the central bank and money works. Or remain ignorant, continue to defend all of Williamson's mistakes and go on believing that low rates lead to low inflation.

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    9. About your other error, rational expectations is an assumption about human behaviour that is most of the times more convenient than more complex expectations (or learning) mechanisms ... but it is definitely not the way you reach an equilibrium. You could replace it with adapative or whatever other expectations and the model should still reach an equilibrium, albeit perhaps a different one.

      Some folks here are definitely seriously confused about basic methodological stuff in economics.

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    10. And of course it doesn't end with basic methodological errors, it continues with empirics. As already pointed out in this blog via links to other blogs, Williamson's claim has not been empirically validated. Low rates do, as conventional theory and common sense predicts, to higher inflation. Not to mention that you are the guy who denied that wages and price rigidity exist.

      So yeah, looks like Williamson and his fanboys fail at theoretical and empirical economics. In the case the blog author respons, we are still waiting for your hyperinflation predictions to realize themselves. :D

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    11. "Do yourself a favour and start reading an Econ 101 textbook to learn how the central bank and money works."

      Bad idea.

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    12. So where is the hyperinflation? Still waiting on it.

      "When the facts change I change my mind. What do you do, sir?" - Keynes

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    13. You haven't been reading.

      http://newmonetarism.blogspot.com/2013/12/fomc-statement.html

      Look at the last paragraph.

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    14. My mistake. Nice to see you finally realizing that you were wrong and that what Keynesians have predicted back in the days is right: http://newmonetarism.blogspot.de/2010/05/there-he-goes-again.html

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    15. "This "educate yourself" nonsense is indeed plain ridiculous when it is uttered by people who do not see the elephant in the room: the tremendous methodological error of using equilibrium conditions without being able to tell how that equilibrium is reached which leads to a wrong result."

      Typical. This is a criticism without meaningful content. There necessarily exists a process -- perhaps not tatonnement, but some price adjustment process -- that leads to the equilibrium. Supposing that process is relatively fast is all that is required.

      And transactions in decentralized markets can occur at prices other than the "Walrasian" one, although that term doesn't really mean much in such a setting.

      Do us, and the world, a favor and be quiet. You're making everyone worse off by speaking on subjects about which you have no correct information.

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    16. "...that what Keynesians have predicted back in the days is right..."

      I'm not sure what Keynesians you are talking about. Right now, Keynesians seem to have a hard time making sense of what is going on.

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    17. On the contrary. Keynesians like Krugman (I linked to an old post of yours in which you chided Krugman for, guess what, predicting low inflation) have predicated low inflation for years whereas you only changed your mind recently.

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    18. Anonymous

      "You could replace it with adapative or whatever other expectations and the model should still reach an equilibrium, albeit perhaps a different one."

      No! Take the simple case of a supply and demand model with linear, normal-sloping curves. Without a Walrasian auctioneer, depending on the relative slopes of demand and supply, with adaptive expectations the model may perpetually oscillate around equilibrium or increasingly diverge from equilibrium. This is the so-called cobweb model, and this result motivated the introduction of rational expectations by Muth (1961), before they were adopted by Lucas. So, by your logic, since there is no Walrasian auctioneer in reality, and the results of the model are sensitive to the types of expectations imposed, we should discard supply and demand, and therefore pretty much all economic theory. Really, too many holes to fill, I give up!

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    19. I give you full credit for changing your mind but like most people you lack the guts to admit that you have been wrong,
      Furthermore you do of course not want to admit that Krugman has been right (about empirical stuff) all along as this blog started off with Krugman bashing.
      So yeah, psychologically understandable but still a joke.

      The Keynesian view of the crisis is crystal clear: aggregate demand shortfall plus ineffective monetary policy because of the ZLB plus austerity means long recession,

      No idea what kind of explanation you have for a worldwide (meaning the 1st world, many 2nd and 3rd world economies are doing fine) recession that endure for years. Eager to hear it though.

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    20. @CA: You talk about a micro model. In macro models adapative expectations do not necessarily lead to multiple equilibria (this is not meant to be an argument for adapative expectations, of course rational expectations are superior).
      Nice try but my point is still correct, the expectation mechanism influences the way towards equilibrium or disequilibrium but is not equal to it as other factors influence it as well.

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    21. "Really, too many holes to fill, I give up!"

      Don't give up. Try starting with Wicksell to get the basics about money. That should fill quite some holes and prevent you from believing nonsense like low rates lead to low inflation.

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    22. "...have predicated low inflation for years whereas you only changed your mind recently."

      Actually no. First Krugman said that we were headed for deflation. Then he changed his mind and said that wage rigidity tells us the long-run Phillips curve is really flat, though there is no evidence for that. Now, the short-run Phillips curve tells us that inflation should be rising, but it's falling. That's a great set of predictions.

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    23. Anonymous January 15, 2014 at 12:09 PM, you write, “There necessarily exists a process -- perhaps not tatonnement, but some price adjustment process -- that leads to the equilibrium.”

      What kind of “necessity” do you have in mind here and what kind of justification can you give for it? When you say there’s always a “price adjustment process that leads to the equilibrium,” do you mean that it’s always possible to conceive of a sequence of “price adjustments” that’s consistent with, and/or will lead to, “the equilibrium” derived in SW’s model? If so, what kind of constraints, if any, must be assumed to achieve this result? For example, Franklin Fisher has shown that, unless you rule out “positive surprises,” you will not, in fact, reach an equilibrium.

      You go on to assert, “Supposing that [the price adjustment] process is relatively fast is all that is required.” What do you mean by “relatively fast,” a day, a week, a month, longer? Larry Summers and (dare I mention his name) Brad DeLong, wrote a paper here arguing that increased wage and price flexibility can be destabilizing. Is that relevant to your claim?

      And when you conclude your reply (not to me) with, “Do us, and the world, a favor and be quiet,” you’re revealing a meanness of spirit that’s not attractive.

      CA, you suggest that I “write a model in which I change the environment and see if the results change” [that I] “keep citing Steve's work and building on his model, which keeps Steve happy even though you are being critical of his results. This is how science works.”

      Granted, this is how “normal” science works, i.e., working within, and refining, the dominant paradigm (see Thomas Kuhn). But many economists, and very good economists, in fact, aren’t satisfied with the dominant paradigm and are looking for a new approach. And given the lack of consensus on so many macroeconomic issues, I think it would be more productive to let a thousand flowers bloom than to try to crush them in the name of “scientific economics.”

      p.s. I’m not at all interested in “discrediting” the results of SW’s model. In general, I like counterintuitive results.

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    24. "If so, what kind of constraints, if any, must be assumed to achieve this result?"

      None, that is the point. You don't seem to know any economics, and interestingly, any math either.

      And no, wage and price rigidities don't matter for the argument, which again you would know if you really knew anything about the area you're criticizing. You sound a lot like a dumber version of Noah Smith.

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    25. Greg,

      "But many economists, and very good economists, in fact, aren’t satisfied with the dominant paradigm and are looking for a new approach."

      Yes, that's good, I support their effort. Maybe complexity theory is the way to go. But I have issues with hypocrisy. Specifically, it ticks me off when people criticize the paradigm Steve, or anyone else for that matter, is using, when they themselves use the same exact paradigm in their scientific work. Someone working within a different paradigm can raise whatever methodological issues they want, especially if they can show that their paradigm delivers better predictions. But what I see here is people saying, it is OK when I use the dominant paradigm because my model a) has fewer equations, b) has a nice story behind it, c) was written while Venus was aligned with Jupiter, etc. but it is not OK when X uses it because we don't like their results. Sorry, it does not work that way. Particularly when some of these critics are pushing for a return to simplistic Keynesianism, Austrian economics (mainly Mises), Wicksell, Minsky, Marx, or any other economist who has been dead and buried for at least half a century.

      You should read Herb Gintis's review of Kartik's book on Amazon. As is well-known, Gintis is a heterodox economist. But he is also a darn good economist, so his criticism is not to be taken lightly, as is the case many other heterodox economists. Well, even Gintis, who cannot wait for a paradigm change, boldly states that "The only virtue of rational expectations macro (RA macro), which Athreya explains so nicely in this book, is that it killed Keynesian macro." Compare Gintis with the likes of Krugman, and you get the idea.

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    26. CA, thanks for the Gintis's citation. I did read it, I generally like Gintis's work, and I look forward to reading Kartik's book when I return home.

      In the meantime, I'm puzzled by this claim (from Anonymous January 15, 2014 at 12:09 PM): "There necessarily exists a process -- perhaps not tatonnement, but some price adjustment process -- that leads to the equilibrium." (I know you didn't write this, but I'm asking you because this particular Anon needs a civics lesson.)

      A couple of questions if you're so inclined: 1) does the modeling that SW and you do require this premise? If so, why? And, finally, what's the nature of the "necessity" involved?

      Thanks again for the dialogue.

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    27. Greg, my work is actually empirical, so while I do some modelling I am not an expert. I will take a shot at it though.

      Equilibrium is a situation where the plans of economic participants (i.e. buyers and sellers) are consistent. Anon refers to what is called a Walrasian or competitive equilibrium. Graphically, it is where demand and supply intersect. In this case consistency is achieved because the quantity offered by the sellers at that price is the same as the quantity demanded by the buyers. However, there are type of equilibria that are not competitive (quantity demanded and supplied are not equal) yet the plans of buyers and sellers are consistent.

      Anyway, going back to the competitive equilibrium, the assumption here is that there is a so-called Walrasian auctioneer who calls prices, sees how much people are willing to sell and buy at that price, and if they two quantities are different he adjusts the price. No trades are allowed to happen until the auctioneer has figured out the price that equates the two. Once he has, buyers and sellers are allowed to trade at that price.

      Clearly, the assumption that an auctioneer performs this role is quite unrealistic. Walras was not very explicit about how the competitive equilibrium would be achieved in real life. He simply said that it would occur through trial and error (tatonnement). However, the cobweb model (http://en.wikipedia.org/wiki/Cobweb_model) showed that whether, in fact, trial and error will work depends on how people form expectations. With adaptive expectations, for example, the market may never converge to the competitive equilibrium depending on the slope of demand relative to supply. Instead, sellers may end up overproducing every other year and underproducing in-between. Muth suggested however that such behavior is inconsistent with rational individuals. Eventually, sellers should realize what they are doing wrong (learn from their mistakes). The equilibrium that emerges when people use all the information available to them is the rational expectations equilibrium (RE), and under certain conditions the Walrasian equilibrium is in fact a RE equilibrium. So, you see, once we get rid of RE, it is hard to justify why markets, even without frictions, should converge to the competitive equilibrium. This is a problem not just for SW but for most models, macro or micro, that make this claim. Now, I am not saying that there are no modelling techniques that involve more complicated, expectation-formation mechanisms. But these tend to be the exception.

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    28. CA, thanks for taking the time to respond and for the lucid explanation. I think I've got it and may try again to address some of these issues on my blog.

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    29. "The only virtue of rational expectations macro (RA macro), which Athreya explains so nicely in this book, is that it killed Keynesian macro." Compare Gintis with the likes of Krugman, and you get the idea.

      So you appreciate a heterodox economist because he cannot stand Keynes. As usual the real issue is an ideological one. Even seventy years after the General Theory has been published some right-wing economists cannot stand the notion that in a balance sheet recession an economy is not, as in normal times, supply- but demand-constrained.

      The real radicals are not the guys who are saying that every few decades we reach a dire situation where we gotta throw the normal rulebook temporarily out of the window. It is the folks who are denying that
      this dire situation exists (denying involuntary unemployment and so on).

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    30. You just don't get it!

      First, Gintis is a good economist for his contributions to the science, like, for example, on the puzzle of prosociality. What he wrote about Keynesian economics is just further proof.

      Second, nowhere did Gintis say that he cannot stand Keynes. That you chose to express yourself that way shows a lot, but more on that later on. I don't know how he feels about him. I, personally, think Keynes had some powerful ideas and contributions, and was a prolific writer. I quote him often in my syllabus.

      As far as ideology, again, how wrong can you be? Steve is arguing that the problem IS low demand for certain goods and services, due to the lack of safe collateral. As for me, I favor a permanently higher expenditure for public infrastructure, I supported much of the stimulus bill (on the basis that it helped localities to continue to provide worthwhile public services despite falling tax revenue), and favor an increase in marginal tax-rates for the upper income distribution to pre-Bush levels. These are not right-wing positions!

      And this is what you don't get. Opposition to Keynesian theory as taught in the 1950 and 1960s is not personal. It is not driven by a dislike for Keynes. Nor is it ideological; Gintis is a socialist: http://en.wikipedia.org/wiki/Herbert_Gintis ). Keynesian theory was an improvement over what existed before, but it had major flaws so it was superseded by a still flawed, but less so, paradigm. Within this new paradigm you have different models that make different policy prescriptions, and many still encompass Keynesian ideas. However, none of these models is convincing enough at this time, so regardless of what Krugman may say, we are still looking for answers.

      Apparently, perhaps because they have been watching too much Hollywood, some people cannot accept this boring view of science. Instead, they prefer to view each theory as a cult with its own totems (scientists whose work is regarded as consistent with the beliefs of the cult) that are used to unite the faithful and demoralize the opponents. And smart people, like Krugman, whose talking points you have been spilling here except without the benefit of his knowledge of the subject, often encourage this view because they feed from the passion that it stirs, thus addressing whatever emotional inadequacies they have been struggling with through their lives. Congratulations, you two deserve each other.

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    31. I really don't get the belief that Keynes had all the mysteries of the world written down in his book, and all we need to do is figure out what he meant.

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    32. Keynes was the first guy (together with Kalecki) who realized two important features of a recession: demand matters and involuntary unemployment exists. Some folks can derive more out of the General Theory but in my eyes these are the only two main worthwhile contributions of Keynes (OK, his distinction between "irreducible uncertainty" and risk expressed in probabilities is also worthwhile). So much about my supposed Keynes fetish.

      Guys like CA who pretend that they are brilliant scientific economists deny that demand matters in a recession and deny that involuntary unemployment exists.

      There is no polite word to describe somebody who believes that food stamps caused the Great Depression (or pretends that expansionary fiscal policy in a liquidity trap would not actually be expansionary because macro is complex so let's better do nothing).

      The funny thing about this is that like CA I am a classical economist. I don't believe any stupid socialist or Post-Keynesian (these guys think that economies are always demand-constrained) nonsense. But in the thirties worldwide, in the nineties in Japan and right now again worldwide (OK, mainly in first world countries) unusual recessions emerged that had two features, a lot of public debt and low interest rates. While we do indeed know too little about QE to evaluate it well we just conducted a large-scale experiment in Europe and its results are what basic macro predicts, contractionary fiscal policy is indeed contractionary.

      So you are wrong, CA, at least in the fiscal era we are not anymore looking for answers, fiscal multipliers are large right now. But even if we are, like in the case of QE, macroeconomists are not just scientists but also engineers (I read my Mankiw). They cannot just write papers. they always have to provide policy advice. And whether you like it or not, the newest research might be totally useless from an engineering point of view. There is no financial sector in DSGE models (Sitglitz and Greenwald were on the right track with their 90s papers).

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    33. "Steve is arguing that the problem IS low demand for certain goods and services, due to the lack of safe collateral."

      Lack of safe collateral should drive loan rates up or, more realistically, lead to more credit rationing. Credit crunch leads to less investment and too little demand. I guess this is the story.
      Of course there are three features missing, QE and deleveraging. Via QE banks could partly fix their balance sheets so they should be willing to lend ... but all attempts to get credit flowing again are useless if product demand is low. Households had a more difficult time to fix their balance sheets as there was no proper public relief program for folks who lost their homes so product demand is low.

      The last part is obviously crucial, especially for the morons who take their intertemporal consumer too literally. The data shows that Friedman got it right, people are actually somewhere in between the Hicksian consumer who eats everything in one period (obviously ridiculous) and the classical consumer who can perfectly smooth consumption over his entire life (wrong as credit markets aren't perfect).

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    34. "Within this new paradigm you have different models that make different policy prescriptions, and many still encompass Keynesian ideas."

      New Keynesian models are labeled Keynesian but they are just RBC plus stick prices (usually not done via Blanchard-Kiyotaki but via a short-cut, Calvo pricing so ironically these supposedly microfounded are quite ad-hoc, they use staggered pricing instead of doing it "properly" via monopolistic competition). Although wage and price rigidity is often called Keynesian Keynes explicitly wrote in Ch.19 that he thinks that more wage flexibility would make matters worse.

      So here I do not agree with the mainstream. Either you ignore micro like Samuelson et al did, you focus on other micro issues like coordination problems or asymmetric information or you focus upon money as the key issue (or, as mentioned above, you connect money with credit and credit market imperfections and this Stiglitzian way is what I personally prefer).

      I do not want to be pedantically historian, who cares what a dead economist thought or wrote. But I think it is important to keep in mind that all kinds of economists focus on market imperfections that could explain macro failures which is not Keynesian at all. The only thing that all Keynesian economists have in mind is lack of demand denial. If there weren't so many halfwits in the economist profession this label would be totally unnecessary, we would have a consensus that demand does indeed matter in a recession and the nuts would be extinct (of course not all of them are nuts, contrary to CA's "economics is ideologically neutral" claim there are plenty of political reasons for demand denial which on the other hand does not necessarily imply that you cannot be a small state, large stimulus right-winger or a large state, no stimulus left-winger ... but these kind of folks are rare).

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    35. "There is no financial sector in DSGE models (Sitglitz and Greenwald were on the right track with their 90s papers)."

      Interesting you say this, being such an "expert." You might want to look at this paper, http://faculty.wcas.northwestern.edu/~lchrist/course/Czech/BGG%201999%20Handbook%20chapter.pdf . That is just one example of MANY papers that include a financial sector. Stop talking about economics, you only seem to know what you learned in high school economics.

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    36. Anonymous of 25 January 5:04 AM.

      I never said demand does not matter. I never said that food stamps caused the Great Depression. I never even discussed the Great Depression. I also never said that there is no involuntary unemployment, I have said that it depends how one defines involuntary unemployment and what time horizon we are looking at. Finally, contrary to what you say in your follow-up at 5:25 AM, a scarcity of financial instruments that serve as safe collateral should drive their price up and their interest rates down.

      In summary, we have established two things. A) IF you are an economist, you are a pretty bad one.
      B) You are a liar.

      One can forgive you for A, but not for B. Therefore, from now in, feel free to spill your venom and lies uninterrupted. I am done.

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    37. Lack of safe collateral means banks increase credit rationing or raise loan rates. This is what has actually happened in the real world, something which you obviously ("I never even discussed the Great Depression") do not care about.

      So yeah, whatever model you and Williamson use, it works ironically in precisely the other way as the real world functions. So much about bad economists. :D

      Denial of reality, be it climate change or the worst recession since the thirties (in some European countries recovery is actually slower than during the thirties). And no matter how often you and Willy repeat your mantras about not being conservatives. you only find demand denial, denial of reality and not giving a shit about unemployment on the right wing.

      I am done as well. Totally pointless to try to talk with the scum of the Earth, neoclassical radicals.

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    38. No one will miss you, if you keep your promise and go away.

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  3. Steve--thanks for linking to the book. CA 8:16 is correct about equilibrium. The line of discussion in the comments above re: what equilibrium does, or does not connote, in a given model was actually a not-so-small motivator for me to write the book, and led me to include a detailed discussion on the topic. The notions of equilibrium used in macroeconomics can, to a great extent, feature all kinds of dynamics and can cope with uncertainty too. But to be clear (and maybe we macroeconomists aren't clear enough on this): in the vast majority of models used, equilibrium does not imply "good" or "not amenable to improvement by policy" or any such thing. It's just a far less loaded term than I think is generally perceived.

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  4. i just started reading this book a couple days ago, i hope it gets some wider press because i don't think there are any other works that provide the same sort of nontechnical introduction to modern macroeconomics. i think the likes of matt yglesias, ryan avent, and other pop econ bloggers would be greatly served by checking it out.

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  5. Thanks for taking a look. I hope it'll clarify for those interested, and also that it provides a tiny push towards turning the temperature of discussions about how "the mainstream" does macro down several notches. The way I see it, macro modeling is far more trade-off-riddled than it is ideology-driven. So it's probably good to talk plainly about how we wrestle with the former.

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  6. Here is an old post ((http://newmonetarism.blogspot.de/2010/08/reply-to-mark-thoma.html)) that illustrates the problem which is obviously behind the paper so often talked about.

    "My interpretation of this is that this is just Irving Fisher. What does it mean to "maintain the fed funds rate at its current level?" Some people seem to think the Fed can't do this."

    "Equilibrium economics is hard enough as it is, without having to deal with the lack of discipline associated with "disequilibrium." In equilibrium economics, particularly monetary equilibrium economics, we have all the equilibria (and more) we can handle, thanks."

    The Fisher equation is just an identity, not an equation that describes actual economic processes. Using an identity to claim that in the long run low rates have to lead to low inflation is not feasible. It is an elementary methodological error.

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    1. "It is an elementary methodological error."

      Afraid you're in error.

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  7. Sounds similar in underlying motivation to Peter Kennedy's Guide to Econometrics, which was a big favorite with students when I was in graduate school. Are there any other similar up-to-date books on macro -- it is a sufficiently contentious field that it might be worth reading more than one. I'll get Kartik's once it is published in the UK. Thanks for flagging it.

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  8. Afraid you are just doing maths. If you wanna do proper economics you have to first and above all realize that it is a social science and that identities/definitions do not describe human behaviour.

    But then again you always had issues with the basic stuff, like not having read your Popper:
    "Like the "efficient markets hypothesis," DSGE has no implications, and therefore can't be wrong." (http://newmonetarism.blogspot.de/2011/08/john-quiggin.html)

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    1. Someone got intellectually crushed and has to resort to petty insults because he has run out of arguments.

      Read your Popper. Until then you are doing ideological but not scientific economics.

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    2. Anyone who cites Popper is obviously way out of his depth. Why should we conduct our business as Popper sees fit? Who made him the arbiter of science? He's just another dead(?) guy who we're supposed to beatify because he wrote something down a long time ago. Science does not require his approval.

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    3. All proper science relies on Popperian falsification. Of course you do have to care about empirics (the author of this blogs like most certainly does not) but then you cannot call the stuff you do science. You can call it theory as long as it is not falsified (e.g. string theory in physics) ... but in macro we have just conducted a giant experiment which made millions of people worse off and falsified ample of economic theories while the respective theoreticians still believe in it (e.g. Williamson still believes in his low rates lead to deflation nonsense although plenty of people have showed him that the data tells the opposite story).

      In short, your dismissal of falsification is equivalent with the plain denial of reality. Another word for this is ideology.

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    4. "All proper science relies on Popperian falsification."

      You need to read your Kuhn.

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    5. Care to elaborate on how verification works in empirical economics? Last time I checked all empirical work uses falsification and not verification, you always reject a hypothesis but never verify it.

      If you can provide a paper which uses this method please name it.

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    6. You should read Kuhn's "The Structure of Scientific Revolutions", which is a historical account of how scientific progress takes place in real life. You will see that Popperian falsification is NOT how any science operates. If it did, science would be impossible. One reason is the Duhem-Quine thesis (http://en.wikipedia.org/wiki/Confirmation_holism).

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    7. Nope, you are simply wrong.
      As expected you cannot mention one economic paper which uses verification. If you ever did some empirical work you would know that even the most simple t-test uses falsification and not verification.

      Physics works in the same way. You can claim that so far the theory of gravity seems to be fine ... but if the apple does one day not fall down but fly up we gotta rethink our theory and improve it.

      If you could verify a scientific hypothesis you would have reached the end of history, science would be theology, "I can read the mind of God". Real science is far more humble, it acknowledges that a theory is just the best explanation we have so far.

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  9. "identities/definitions do not describe human behaviour"

    I guess this takes care of over a century of economic theorizing, including Keynes. Now I can eat dinner in peace.

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    1. About Keynes, if you had actually read him you would know that you can count the number of equation he uses on one hand and that none of his insights rely on identities.

      About identities, an identity like "real interest rate is defines as nominal rate minus inflation" is not the same as something like the Euler equation which is the result of intertemporal utility maximization. The former is just a definition whereas the latter describes a consumption choice. It might not be realistic or fit the data but it describes a hypothetical decision process of a human being. The definition of a variable on the other hand does not.

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    2. Ah, we have a qualification: It is, in fact, OK to describe human behavior with equations, like Keynes's liquidity preference one, provided that you their number is such that they can be counted on one hand, two hands, alright, at most two hands and a foot.

      Boy, this keeps getting better!

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    3. No idea which part you do not understand. An identity/definition does not describe any human behaviour whereas a simple money demand function or the presence of money in a utility functions captures liquidity preferences. Similarly the Euler equation captures our impatience.

      Is economics on this level OK? Certainly not, there is ample to improve. But any of these equations is superior to an identity/definition which cannot describe human behaviour at all as it is just a definition.

      No idea which part of the definition of a definition/identity you do not get.

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    4. Above anonymous is rather confused and seems not to understand that equations are not superior to each other. Of course, we are superior to above anonymous, because we're not dumb.

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    5. "Qquations are not superior to each other" is the only piece of substance in your post ... and on a second glance it has actually it no substance at all as you still fail to understand what an identity/definition is and what an equation which captures some aspect of human behaviour (e.g. utility functions are convex as ceteris paribus we prefer a mix of goods over a lot of one good) is.

      No wonder that Williamson and his fanboys believe ridiculous nonsense, they even do not understand the very basic stuff (where I come from you learn what an identity is in highschool maths).

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    6. Where I come from people aren't stupid. Clearly the above poster isn't from there.

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    7. Ah, the troll who cannot provide anything of substance is back. You know that you crushed the enemy when he ran out of arguments about the issue and goes ad hominem.

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    8. I'm not providing arguments, I'm simply mocking you. I'm not going to argue with a halfwit.

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  10. I prefer to read Williamson's textbook.

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  11. Just bought this. Thanks for the recommendation.

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  12. I liked Economic Policy, Theory and Practice.
    http://www.amazon.com/Economic-Policy-Practice-Agn%C3%A8s-B%C3%A9nassy-Qu%C3%A9r%C3%A9/dp/0195322738/ref=sr_1_1?s=books&ie=UTF8&qid=1390403291&sr=1-1&keywords=economic+policy

    Norwegien

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