Go to Le Chic Shack, it is a great place. Order the signature fries.
Kürzeres auf / Shorter stuff on Twitter
Go to Le Chic Shack, it is a great place. Order the signature fries.
Okay, sometimes there are these moments when you realize what you don’t really understand.
I would be grateful if anyone could hint me to a tractable, understandable, and plausible macroeconomic model that explains the role of monetary and fiscal policy in the current crisis. (The rigidity “wrong currency area” does not even have to be included.) What should be included: A plausible explanation for what happened, why it happened, and why it seems to be persistent. And, finally, which model of the crisis implies austerity policy?
Was it a supply-side shock of technology decrease or leisure demand increase? Sorry, but that seems extremely implausible. So let’s suppose it was a negative demand shock, people have raised their desire to hold liquid assets instead of less liquid investment goods. Fine. So what would be the optimal policy response?
Let’s assume we were not at the famous zero lower bound, so that only monetary policy would be necessary. The optimal response, supposedly, would be to lower interest rates.
Now suppose the central bank could, for some reason, not do that, and we also had no fiscal policy instruments. What would happen?
It seems that, well, waiting a while should let this demand shock disappear. If it was just random, then it should not take an eternity until demand has gone back to previous levels. There does not seem to be any reason why the economy after the shock should look that much worse than before.
Okay, there may be some time of too little investment during the crisis, borrowing constraints and all that may make it worse, and there may be unemployeds losing their skills. But what I don’t see is any reason why a temporary business cycle demand shock should necessitate “structural reforms”, layoffs in the public sector, reductions of pensions etc.? Basically, after a shock, the economy should go back to its previous trajectory.
That’s the major point. Now comes a minor point about current models and explanations. There are some people saying that ISLM has done perfectly explaining and predicting the crisis. I don’t really understand that claim, because everything I said above should be true for ISLM as well. Additionally, ISLM is in some respects as little as an explanation as RBC models are. In RBC, there is an exogenous supply shock. In ISLM, something moves the IS or the LM curve. But what? And for how long? So, a model with optimizing agents and plausible explanations would be great.
So, if you know one, please refer me to a plausible macroeconomic model of what’s happening.
The bottom line is that although I have political views — and wear them on my sleeve! — I’m not so postmodern as to believe that all truth is political. Some economic doctrines work, others don’t. And my doctrine seems, objectively, non-politically, to have been working better than the other guys’.
…This clearly illustrates the perils of engaging in what I like to call “phlogistonomics” (a term coined by Matt Yglesias). The method goes like this:
Step 1: Take some hard-to-understand phenomenon, like economic growth. Explain the parts you can explain with standard economics (capital, labor, prices, etc.). What’s left - the part that really drives the model - is the phlogiston.
Step 2: Label the phlogiston. Make sure you choose a name that refers to something people in general already believe in. “Culture” is great. “Confidence” works too, as do “institutions”, “technology”, “power”,”the true desires of the Fed”, and of course, “irrational expectations” …
Step 3: Act like you know exactly how the phlogiston behaves. Predict its effects based on commonly held national/ethnic/gender stereotypes (“Greece is in trouble because Greeks are lazy!”), or your political beliefs (“Obama the Kenyan Muslim socialist is killing business confidence!”), or any plausible-sounding story that plays to popular prejudices, preconceptions, fears, or hopes.
Replication is basically the independent repetition of scientific analyses by other scientists, with the aim of controlling the results. The principle is well accepted in the natural sciences. However, it is far less common in empirical economics, even though non-reproducible research can barely be considered a contribution to the consolidated body of scientific knowledge.
