tag:blogger.com,1999:blog-8702840202604739302.post8556357502375516580..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: In defense of modern macro theoryDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-8702840202604739302.post-85443512279634217842015-04-18T11:57:59.703-07:002015-04-18T11:57:59.703-07:00Domo arigato gozaimasu. :)Domo arigato gozaimasu. :)David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-16690064426779638342015-04-18T09:52:57.503-07:002015-04-18T09:52:57.503-07:00Minor quibble: I think you meant "Hiragana&qu...Minor quibble: I think you meant "Hiragana" by "Hirigana".himaginaryhttps://www.blogger.com/profile/03409531853330541896noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-44911796440534461172015-04-17T14:50:40.672-07:002015-04-17T14:50:40.672-07:00Never mind on (3). I found a nice paper from FRBNY...Never mind on (3). I found a nice paper from FRBNY that addresses my confusion. If anyone else is confused: http://www.newyorkfed.org/research/staff_reports/sr380.pdfProf Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-69587122603786872202015-04-17T13:46:42.648-07:002015-04-17T13:46:42.648-07:00(1) I'm thinking in terms of the MV = PY equat...(1) I'm thinking in terms of the MV = PY equation. PY in that case is spending on all goods & services, not just final goods & services. From an accounting perspective, sure PY=NGDP. From a money demand perspective, I'm not so sure.<br /><br />(2) Indeed.<br /><br />(3) I guess I'm confused as to why there is so much 'excess reserves' now, but not prior to 2008. <br /><br />Thanks, David. Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-24507331429834711972015-04-16T18:28:50.844-07:002015-04-16T18:28:50.844-07:00Prof J, a few things to clear up:
[1] PY = NGDP, ...Prof J, a few things to clear up:<br /><br />[1] PY = NGDP, where Y is RGDP.<br /><br />[2] Targeting P is just as hard as PY in a world of excess reserves.<br /><br />[3] Banks do not "lend out" reserves. They create demand deposit liabilities made redeemable for cash. They reserves always stay in the system, unless the Fed drains them through an open market operation.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-53248713746167787982015-04-16T06:42:02.124-07:002015-04-16T06:42:02.124-07:00David,
Yes indeed, I buy your argument. My questi...David,<br /><br />Yes indeed, I buy your argument. My question is how would targeting PY (which is a far cry from NGDP, but let that go for now) instead of P cause banks to lend out their excess reserves. Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-67726225568983410672015-04-15T21:28:44.321-07:002015-04-15T21:28:44.321-07:00Ben,
I think you're suggesting that measured ...Ben,<br /><br />I think you're suggesting that measured GDP is likely to decline going forward because significant amounts of trade will be moved to the informal sector. If this is true, then we may conclude that we are experiencing a "secular stagnation" when in fact it's just a measurement issue. I'm not sure what the implications are for DGSE models...do you mean, implications for estimating their parameters?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-92096242270079813892015-04-15T21:21:26.480-07:002015-04-15T21:21:26.480-07:00Prof J, well, I'm not sure of the exact mechan...Prof J, well, I'm not sure of the exact mechanism people have in mind. But if one accepts that the Fed has some control over the price-level P through whatever tools it presently has, then surely it must have some control over PY, no?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-56960829400851671432015-04-15T20:11:59.488-07:002015-04-15T20:11:59.488-07:00I have a question: how sensitive are DSGE models t...I have a question: how sensitive are DSGE models to inaccuracies in reported data?<br /><br />I ask this because there is a growing underground cash economy in Western nations. When a modern nation with high taxes gets to deflation, the use of cash explodes. We have seen this in Japan and now Europe and now the United States.<br /><br />Of course this will mean large amounts of economic activity slip off the radar. The problem will get worse as long as there is deflation and it makes sense to hold lots of cash.<br /><br />See my recent post over at Marcus Nunes' place. Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-71501099667505574902015-04-15T05:57:30.150-07:002015-04-15T05:57:30.150-07:00David,
Koenig's paper was interesting, and a ...David,<br /><br />Koenig's paper was interesting, and a good start. I'm still left in the cold on one important question, and that is the mechanism for NGDPLT. Unless the entire federal reserve system is to be re-engineered, monetary policy still has to work through reserve requirements, fed funds rate setting, and open market operations. I'm not convinced that what was needed from the FRBNY is to buy even more fixed income securities than they did. If you can aid my confusion on this issue, I'd be very obliged. Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-87398507974218640912015-04-14T18:50:18.647-07:002015-04-14T18:50:18.647-07:00The "conflicting policy advice" comes fr...The "conflicting policy advice" comes from the uncertainty surrounding conditioning factors and parameters, what forces are to be emphasized, and which are to be assumed away. I guess there really is no "modern macro theory," it is probably better described as a methodology that encompasses a wide range of theories, or hypotheses, many of which offer conflicting policy advice. <br /><br />Thanks for the reference to Geanokoplos and Famer, I had not seen that work. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-67781077451451664532015-04-14T12:52:59.987-07:002015-04-14T12:52:59.987-07:00David,
Thanks for taking the time to reply. John ...David,<br /><br />Thanks for taking the time to reply. John Geanakoplos (and J. Doyne Farmer) published a paper in 2008 entitled "The Virtues and Vices of Equilibrium and the Future of Financial Economics," in which the authors, in addition to describing the virtues of equilibrium models, argue that "the majority of economists have become so conditioned to explain everything in terms of equilibrium that they do not appreciate that there are many circumstances in which this is unlikely to be appropriate.” They go on to argue for the use of agent-based modeling in some of these cases.<br /><br />I didn't mention "heterogeneous preferences" nor "rational expectations." Rather, I was suggesting that it might be useful to explore the consequences of heterogeneous expectations, which, after all, seem to characterize the world in which we actually live. <br /><br />I don't know whether models that assume different expectations and inconsistent plans would generate "superior policy advice." But I think it's fair to say that "modern macro," as you describe it, seems to have generated a lot of conflicting policy advice. <br />Anonymoushttps://www.blogger.com/profile/11677815746117897839noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-64647112472639372972015-04-14T07:23:46.400-07:002015-04-14T07:23:46.400-07:00Thanks! This paper looks like a good start. I'...Thanks! This paper looks like a good start. I'll sit with it for a while.Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-68701552539408637462015-04-14T06:06:44.957-07:002015-04-14T06:06:44.957-07:00Greg,
In fact, economists experiment with alterna...Greg,<br /><br />In fact, economists experiment with alternative solution (consistency) concepts all the time. For an example of heterogeneous preferences, see the work of John Geanakoplos of Yale: http://cowles.econ.yale.edu/~gean/crisis/index.htm<br /><br />My own boss, Jim Bullard, has worked extensively on models that drop the rational expectations hypothesis. I could go on and on. <br /><br />And I don't like the "disequilibrium" economics idea -- these are just "equilibrium" models in the sense they employ solution concepts to close the model (different solution concepts than are normally used, but solution concepts nevertheless).<br /><br />And finally, we have to ask the question of *why* would you want to go down the paths you lament are not being sufficiently explored? Precisely *how* would they have generated (ex ante, of course) superior policy advice?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-88017489961539667582015-04-14T05:55:38.138-07:002015-04-14T05:55:38.138-07:00Always good to hear from you, Prof J. :)
By the w...Always good to hear from you, Prof J. :)<br /><br />By the way, on a theory of NGDP targeting, look here: http://andolfatto.blogspot.com/2013/09/like-good-neighbor-evan-koenig-on-ngdp.htmlDavid Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-18671965631235086482015-04-14T05:53:35.032-07:002015-04-14T05:53:35.032-07:00Well, I agree with your concluding point. However,...Well, I agree with your concluding point. However, I'm still curious to know how what you suggest might work in practice. Tell me how your preferred policy might have evolved in lat 1990 and in the early 2000s (not foreseeing, of course, the actual path of the economy).David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-57277769500317649642015-04-13T23:38:47.914-07:002015-04-13T23:38:47.914-07:00I think mist people who did not study economics or...I think mist people who did not study economics or just in bachelor do not realize that mathematematics is a language and a way to check internal consistency of a theory, as you say. They do not realize wxhen they criticize the use of dynamic programing (for example), they are actually critizing the hypothesis of rationality or rational expectations.<br /><br />Furthermore, I think the analogy with physics some people are using is misleading and make them forget what economics is about: understanding and predicting human behavors. When we speak of markets, GDP, growth etc. I guess lot of people seem to forget that we are speaking of the outcome of intercating agents with endogenous behaviors. If we econ'omists say publicly that there will be a crisis on market X day Y, can we believe that it won't affect the equilibrium? (EMH?). Economics is not weather forecasting.Math. Bo.https://www.blogger.com/profile/10481664971830236516noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-74227362093674995412015-04-13T20:09:23.299-07:002015-04-13T20:09:23.299-07:00David, you ask, “Do you want to do away with consi...David, you ask, “Do you want to do away with consistency requirements, like the respect for resource feasibility”?<br /><br />No, but in your spirit of pluralism, I would like model builders to occasionally drop the premise that market participants share the same expectations regarding the future course of prices, etc., and that all their plans are mutually consistent (or something like this).<br /> <br />I realize they're "only models," but it seems that you're apt to miss something essential when you ignore (or abstract from) the fact that there are "bulls" and "bears" in every market, that there are Austrians, New Market Monetarists, New Keynesians, RBC types, etc., who advise organizations, public and private, that have massive resources to deploy. <br />Wouldn't the results of a change in Fed policy depend on the distribution of these Macro Views across the organizations the decisions of which will determine the policy's result? (Maybe you could call this the “Lucas Critique 2”).<br /><br />I’m pretty sure these assumptions don’t rule out the use of mathematics. The small group of economists who explored “disequilibrium macro” – F. Hahn, F. M. Fisher, J.P. Benassy, E. Malinvaud, et al – were/are very good at math. It’s too bad this route from Arrow-Debru has so few travelers.<br />Anonymoushttps://www.blogger.com/profile/11677815746117897839noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-11749629717330325422015-04-13T15:09:55.156-07:002015-04-13T15:09:55.156-07:00Yes, but unless you're maximising some highly ...Yes, but unless you're maximising some highly conservative ambiguity averse preferences, you'll want to invest much less in the contingency plan if it's against a 2% probability event than if it's a 10% probability event (maybe 20% if you conditioned on the right information in mid 2008?). And contingency plans are rarely free lunches. My impression is that they often involve putting some brakes on economic activity that may reduce steady state output (e.g limiting borrowing in normal times) in order to reduce the intensity of crises. So having a macro model that better captures the tail of the distribution is important. I guess, one answer to this complaint is that 1) the economy is one of the most complex systems to predict for any given percentile of the distribution, and 2) tail behaviour a priori is even more complicated and an area of further research than behaviour within +/- epsilon of validity of the loglinar approximation of a macro model.<br />Anyways, I think my point was in part that proponents of old style keynesian macro models are not exactly in the best position to complain about DSGE models not predicting the crisis.danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-48735600516799852192015-04-13T14:34:39.922-07:002015-04-13T14:34:39.922-07:00"Alright, so much for blaming economists and ..."Alright, so much for blaming economists and their less-than-crystal balls"<br /><br />The Italians will be an early warning system on this matter: http://www.theguardian.com/world/2012/oct/23/jailing-italian-seismologists-scientific-community<br /><br />You've got a lot packed in here, so I'll just add a couple of my pet peeves. First, regarding the attacks that come from outside the profession. It's unacceptable to blame modern macro theory for things that are not the responsibility of macro theory. If the government fucks up by the numbers, don't blame the messenger that said mandating longer UI benefits would result in lengthening unemployment spells (for example). I can point to any number of macro models that say intervening with markets during a recession is counterproductive.<br /><br />Second, within the profession. There's a lot of dismissal going on that is politically motivated. If someone wants a policy job, then it's a good idea to write down a model that says government intervention is a good idea. I don't blame the theorist for doing this, but I do blame the government for creating this incentive as it doesn't advance the science. However, competition for journal space is high, which helps get only the best papers in. Of course, it could keep some very innovative papers out, but there's plenty of journals out there for everyone :). <br /><br />I'm not convinced the above is a huge problem, though. I follow several of the Fed periodicals, and if any economist would be expected to be biased towards the Fed, it would be the Fed's own economists. However (and not trying to polish the apple here) I see basically no bias amongst Fed economists. <br /><br />Finally, there is perhaps a big divide between academic macro that appears in the journals, and the musings that appear on blogs. Hadn't we better define our terms before attacking macro theory? If that sounds like I'm still waiting for an NGDPLT model, that's because I am.<br /><br />Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-2354274520177209032015-04-13T13:26:53.468-07:002015-04-13T13:26:53.468-07:00Daniels,
Perhaps. But my own view is more along t...Daniels,<br /><br />Perhaps. But my own view is more along the following line. A weatherman forecasts that tomorrow will be sunny, with 95% probability. Tomorrow comes and it rains. When it does, people will say that the weatherman significantly underestimated the probability of rain. It's easy to say that the probability of crisis was underestimated after the fact, isn't it?<br /><br />The point is that we already know it's going to rain one day. And so we should have contingency plans in place for when that day comes. The fact that some are caught unprepared has nothing to do with forecasting accuracy. <br /><br />And again, after the fact, it seems easy to suggest pre-emptive action, but in real time it is much more difficult. Should the Fed have intervened in the late 90s to prevent the dotcom bubble? The stock market crashed without any financial crisis. What would have happened if the Fed *had* intervened to avert a crisis that would never have materialized? David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-77932690240071885912015-04-13T12:31:43.697-07:002015-04-13T12:31:43.697-07:00David, the legitimate complaint isn't that eco...David, the legitimate complaint isn't that economists didn't predict the crisis, but that the models they were using (explicit formal ones, or implicit mental ones) were badly miscalibrated, significantly underestimating the probability of a crisis. <br />Here's some evidence from the US and Eurozone SPF's. Most probably none of the forecasters surveyed was using a DSGE model. The intellectual framework behind most of these forecasts is probably some sort of non-optimising IS/LM model, maybe formalised as a large macro SEM. <br />See table 5 here,<br />http://www.phil.frb.org/research-and-data/real-time-center/survey-of-professional-forecasters/2008/spfq308.pdf?CFID=71298847&CFTOKEN=7c0687510db831cd-F3677CB7-E8F6-9D5E-4B08654C2BC6870B&jsessionid=8430f6afc26f734e61d5107b13146a794d2b<br />And here for the Eurozone<br />http://www.ecb.europa.eu/stats/prices/indic/forecast/html/table_3_2008q3.en.html<br /><br />danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.com