In 1994, economists Greg Mankiw and Lawrence Ball wrote an essay for the National Bureau of Economic Research entitled “A Sticky-Price Manifesto.”...[T]he essay heralded the beginning of a macroeconomics mini-revolution. It was a direct threat to the line of research that had been dominant in the 1980s, which tried to explain recessions without sticky prices...
The economic establishment reacted harshly to the upstarts. “Why do I have to read this?" fumed Robert Lucas, the dean of macroeconomics. "This paper contributes nothing.” He went on to accuse the sticky-pricers of being opposed to science and progress.
But Lucas fumed in vain. During the following decade, the sticky-price models went from strength to strength. New math was developed to make them easier to use. Possible reasons for price stickiness were investigated -- for example, “menu costs,” in which the seemingly trivial costs of changing prices add up to a big problem across the broader economy.
Even more telling, sticky-price theorists proved that you didn’t need a lot of price stickiness to mess up the smooth working of the economy. Even the tiniest dash of stickiness would turn all kinds of theories on their heads. Economists Susanto Basu, John Fernald, and my doctoral adviser Miles Kimball, for example, showed that when prices are even a little sticky, bursts of technological progress actually hurt the economy for a short while, by causing a burst of deflation, before eventually boosting growth. Over time, the addition of various other economic mechanisms, like labor search, has further reduced the amount of price stickiness required to cause major recessions.
Sticky-price models have become the dominant models used at central banks. The smoothly adjusting, flexible-price models of the 1980s are basically not used anywhere, by anyone, for anything.
Even some of the biggest skeptics of sticky prices are coming around. In 2004, economists Mark Bils and Peter Klenow looked at how businesses changed prices, and found that the changes were too frequent to be consistent with the sticky-price story. But in 2014, they reversed their stance, looking at evidence on the adjustment of markets in recessions and concluding that “sticky prices...deserve a central place in business cycle research.” Meanwhile...Patrick Kehoe...long-time [opponent] of the mainstream sticky-price models, nevertheless wrote a paper in 2010 entitled “Prices are Sticky After All.”...
The moral of the story is that if you just keep pounding away with theory and evidence, even the toughest orthodoxy in a mean, confrontational field like macroeconomics will eventually have to give you some respect.Steve Williamson wrote a response to my post, and for the life of me I can't tell what he's trying to say. He calls me "confused". Well, after reading his post, I am confused.
Williamson takes some potshots at Ball and Mankiw:
The "Sticky Price Manifesto" is in part a survey of the menu cost literature, but it reads like a religious polemic...
Why should we care what Ball and Mankiw think is going on in the minds of their staw-men opponents, or in the classrooms of those straw-men? Why should we care what Ball and Mankiw "believe?"...
Noah seems to think that Lucas was being unduly harsh [in his response to Ball and Mankiw], and that he was somehow feeling threatened by these "upstarts." It's pretty clear, actually, that Lucas just thinks it's a bad paper - religion, not science - and that Ball and Mankiw could do a lot better...He then asserts that New Keynesian models don't have anything to do with the stuff Ball and Mankiw were writing about:
Noah is more than a little confused about the genesis of sticky-price New Keynesian (NK) models. In particular, he thinks that Ball and Mankiw's "Sticky Price Manifesto" was a watershed in the NK revolution. Far from it...
Where did NK come from? Which of the three threads in post-macro revolution Keynesian economics - coordination failures, sunspots, menu costs - morphs into Woodfordian NK models? To a first approximation, none of them. Perhaps NK owes a little to the menu cost approach, but it's really a direct offshoot of real business cycle theory. Take a Kydland and Prescott (1982) RBC model, eliminate some bells and whistles, add Dixit-Stiglitz monopolistic competition, and you have Rotemberg and Woodford's chapter from "Frontiers of Business Cycle Research." Add some price stickiness, and you have NK. So, NK basically leapfrogs most of the "Keynesian" literature from the 1980s. It's much more about RBC than about Ball and Mankiw.(For a brief intro to Mankiw's contribution to the New Keynesian research program, see the Wikipedia page for New Keynesian economics. See also the Wikipedia page for Steve Williamson.)
Williamson then tries to claim ownership of New Keynesian models for Chicago/Robert Lucas/RBC/His Majesty the King of Spain/I'm not sure:
[I]t's worth noting that Mike Woodford, the key player in NK macro, was at the University of Chicago from 1986 to 1992, the latter 3 years in the Department of Economics with - guess who - Bob Lucas. Indeed, they wrote a paper together. It's about - guess what - a kind of sticky price model with non-neutralities of money. Later on, Lucas wrote about sticky prices with Mike Golosov. So, I think we could make the case that the influence of Lucas on NK is huge, and that of Ball and Mankiw is tiny.He then goes off on a long tangent about how central bankers might use sticky-price models to think about financial stability (which, apparently, he thinks is now the main priority for central banks).
It's kind of funny to see Williamson trying to wrest historical credit for New Keynesian models from Mankiw & co., since just in his previous post he had this to say:
Mike Woodford can correct me on this, but my impression is that he came out of graduate school with a specific goal in mind, which was creating a version of Keynesian economics that would fit into modern macro. Ed Prescott's project left central bankers scratching their heads about what they were supposed to be doing, and Woodford and others stepped into the void. Interest and Prices is, I think, intended as a handbook for central bankers. There was a lot of effort put into marketing the whole NK project to the world's central banks. This is ongoing, and has been institutionalized[.]So NK was reverse-engineering of Keynesian ideas. But actually it was just RBC. But it succeeded because it was promoted via a slick marketing campaign. But actually Lucas was one of its founders.
Also, microfoundations are important. But Mankiw's efforts to microfound sticky prices with menu costs was totally unimportant to the creation of sticky-price macro models.
Got that?
Damn, I guess I am confused.
I am with Steve on that one. I was in Pittsburgh when Mankiw presented his manifesto, and it was a bad paper, like he had done it on the plane. Lucas was visibly upset that such a shoddy piece was presented at this respectable conference.He know Mankiw and Ball were capable of better.
ReplyDeleteYes, the NK agenda piggy-backed on the RBC agenda.It was about price-rigidities only later. What mattered was the mark-up, whether it was pro- or countercyclical in the data and the models. Various arguments were brought to the table for this, and rigidities in prices (or wages) were certainly not the first ones.
I am with Steve on that one. I was in Pittsburgh when Mankiw presented his manifesto, and it was a bad paper, like he had done it on the plane. Lucas was visibly upset that such a shoddy piece was presented at this respectable conference.He know Mankiw and Ball were capable of better.
DeleteI have no doubt that Lucas thought it was shoddy. But Lucas' rant is just the mirror image of it, only meaner. These were blog posts before blogs.
Yes, the NK agenda piggy-backed on the RBC agenda.It was about price-rigidities only later. What mattered was the mark-up, whether it was pro- or countercyclical in the data and the models. Various arguments were brought to the table for this, and rigidities in prices (or wages) were certainly not the first ones.
Interesting. But sticky prices ended up being the big friction in NK models, when all ways said and done. And when you trace that idea back, I think it's hard to argue that Mankiw wasn't pivotal to getting it (mostly) accepted.
Let me get this straight.
DeleteTo Lucas, Ball and Romer's "A Sticky Price Manifesto" was an unacceptable, shoddy piece of work (which deserved his ornery and dismissive reply).
By contrast, Lucas and Sargent's similarly polemical "After Keynesian Macroeconomics" a decade and a half earlier was a shining triumph for the rational expectations revolution.
Of course, these cases were completely different. When Lucas and Sargent presented their paper at the Boston Fed, they were entering the heart of the established orthodoxy and making their critique. Whereas when Ball and Mankiw presented at Carnegie-Rochester, they were also going up against established orthodoxy and... oh wait, once Lucas is the established orthodoxy you're no longer allowed to do polemical critiques of the orthodoxy. Guess that's the rule!
Lucas does not come off well here by any stretch of the imagination.
Wrong, you turd. Bob and Tom were asked to write a paper precisely on that topic. Greg and Larry were contracted to write a scientific paper on sticky-price models and how they play a role in the effectiveness of monetary policy, and what they produced was little better than a sociologist's screed about the evil economists.
DeleteI also was there. Bob was pissed because a scarce and valuable spot in the conference (where many important papers first came to light) was wasted on a paper that did not advance economic science in any way; it didn't even present any new evidence.
Noah, you really should keep your mouth shut more. I look forward to the day when you cease being able to claim you're an economist.
And yes, I use their first names because I know all four of them.
Seems like Noah struck a nerve. That you know these people is irrelevant. Your use of "screed" reveals overpowering anti-intellectual biases that already call into question the validity of anything you say. And you really miss Noah's point. (And I am no Noah supporter, if anything the opposite.)
DeleteIn fact, your whole response sounds more vapid than what I hear from the sixth graders at my kids' school who tell fart jokes all the time. Perhaps, rather than throw a hypocritical hissy fit, you could actually contribute something of substance.
"Wrong, you turd. Bob and Tom were asked to write a paper precisely on that topic."
DeleteOkay, so you're saying that the sweet old Keynesians at the Boston Fed in 1978 asked Lucas and Sargent specifically to make sweeping statements about how dumb and catastrophically wrong they were? Here's one quote from the Lucas-Sargent paper:
"That these predictions were wildly incorrect and that the doctrine on which they were based is fundamentally flawed are now simple matters of fact involving no novelties in economic theory."
Here is a quote from an interview with Lucas in Snowdon and Vane's book about this paper:
"We were invited to a conference sponsored by the Boston Fed. In a way it was like being in the enemy camp and we were trying to make a statement that we weren't going to be assimilated."
Huh, that sounds a lot like what Ball and Mankiw were doing a decade and a half later, doesn't it -- making a powerful and tightly argued case that they weren't going to be assimilated?
But of course, these situations are Entirely Different... because you have personal knowledge that the Boston Fed was actively begging for a biting polemic, while Carnegie-Rochester wanted a much drier and more evenhanded review article on sticky prices? Or something? Yeah.
Wrong, you turd.
DeleteAnd yes, I use their first names because I know all four of them.
Haha you dumbass. :-)
I hope you realize that there's a stereotype of freshwater people as meathead jerks who think that pretending to be junior high bully-boys can substitute for talent. You know that stereotype is out there, right? By showing up in blogs to talk anonymous smack and then bragging about knowing famous old guys, you're definitely contributing to that stereotype.
It always amazes me to see guys who think that calling names and telling people to shut up is a way to win intellectual/academic battles. Don't you know that never works? If you pretend to be Biff Tannen, people are going to think you and your buddies are just not that bright.
He should make like a tree and get the hell outta here
DeleteTo Anon who "knows all four of them". If you're telling the truth (and sounds like you are from the tone) and this is coming from one of the senior macro guys, this is just pathetic. If you want to post scathing comments about your fellow economists, at least be honest and put your name down, rather than trolling anonymously. Are you prepared to do that?
DeleteThinks kind of thing is quite disheartening to hear for me as a current macro grad student, but I'm learning not to expect much better. I guess you're one of the guys who rejects papers just because they have certain words in them ("Keynesian" or "Calvo" or whatever), regardless of the actual content. I also find it funny how most freshwater guys loove the word "science", but this kind of dogmatic approach is the opposite of scientific method! Really amazing (not in a good way).
Lucas' revolution wasn't science either. There was no proof in his pamphlet that old Keynesian macro was wrong. His demand was to throw everything people knuew out of the window, not because the old models were wrong, but because we didn't precisely knew why they were right. In a way, he took the same steps that defenders of neo-classical economics say we shouldn't do, which is that, yes, neo-classical economcis is wrong, but we shouldn't throw it all out because we've got nothing that could replace it.
DeleteYou should try dropping your own first name. It says a lot about you that you've been reduced to hurling childish insults behind a veil of anonymity like a coward. Utterly shameful. Hope you were smart enough to mask your IP, because this would permanently damage your reputation.
DeleteEconomists can be so rude/snarky to each other, I love it :)
ReplyDeleteThis is a stunningly bad effort at synopsis. I suggest anyone interested in the substance of this discussion actually read Williamson's post(s). I think my general worldview is much closer to Noah's than to Williamson's, but this is just terrible:
ReplyDelete(1) Pot shots or not, Williamson is directly refuting the point made in your column. The Ball/Mankiw paper was not criticized by Lucas because it presented a model he disagreed with, it was because it did not contribute anything to the literature, besides pro-New Keynesian polemic. Read the paper, and Lucas's comment, and try to say Noah was right with a straight face.
(2) There's pretty widespread agreement that contemporary New Keynesian DSGE models are RBC models with sticky prices (and various other frictions). Mankiw played an important roles in making sticky prices respectable post-Lucas, but he did so by (trying) to answer the Lucas critique with microfoundations. And to the extent those microfoundations were incorporated into the contemporary models, the rest of the model is RBC, another response to Lucas. Williamson is making the banal, but not often observed, point that Lucas's influence on current models runs deeper than Mankiw's. This doesn't mean Lucas was a "founder", it's just an observation that NK looks the way it does largely because this is more or less how it had to look to play by the rules of the game post-Lucas.
(3) The point here is not that NK was developed at Chicago, or developed by Lucas, but that Lucas, in addition to point (2) above, also dabbled in some early NK DSGE models with Woodford himself. This is not some out-of-nowhere observation--it's a response to your implication that Lucas wanted nothing to do with sticky price models.
Williamson is worth responding to, both because he lays his cards out on the table intelligently, but also because he's wrong. This is the kind of response that makes his seem like the only adult in the room.
This is a stunningly bad effort at synopsis.
DeleteWell I told you I was confused, didn't you believe me? :-)
We believe you, because you are always confused. Stick to teaching low-grade MBAs nothing of importance, because your public statements are those of an idiot.
DeletePresumably better confused than certain and wrong.
Deletewow! coming back to this blog after a longish break. This is great fun, did I miss any other classics from Quixote Williams?
DeleteEvery single time I encounter these genuflections by the freshwater types at the Lucas-Prescott altar, I tirelessly point out Paul Samuelson's comments on Lucas. Which basically amount to Lucas' inability to contribute anything useful at the Fed meetings (when he was invited)
http://www.theatlantic.com/politics/archive/2009/06/an-interview-with-paul-samuelson-part-one/19572/
As an outsider I can give you my interpretation. I know very little about the internal history of the field in general. I'm judging by the models themselves, and to be totally honest, I rarely read papers. I follow the discussions and the representations of the models that appear in blogs. I've read some papers enough to get the flavors, but I find most of them boring, wrong and self absorbed in intention. No, I'm not trying to make everyone mad, but I am trying to point out some of the causes of the politics in this field. It is certainly tainted by real, international politics, but there even more to it than that. This is personal for many people. Anyway, to get on with the point:
ReplyDeleteIt seems to me that NK models are a lacking attempt to bridge the gap between Keynesian ideas and RBC/Rational Expectations. The place where NK goes very wrong is in using the RBC/Rational Expectations ideas in a Keynesian framework in an attempt of one upsmanship. It was a political reaction to a technical problem.
Woodford seems really good these days, but I can see a fairly strong RBC/Rational Expectations thread in his monetary ideas. He's attempted to bridge the gap in these 2 distance world views, and he's done better than anyone in doing that, however I find his general conclusions to be too conciliatory towards RBC/Rational Expectations.
It is pretty clear to me that nobody in the field dares to question the monetary system. Only the MMT group dares do that, and because of that they're isolated by the industry, and because of that isolation they're not quite right either. They're missing out on some stuff because the politics get in the way.
I'm afraid that that questioning the absolute correctness of our monetary system is out of bounds for most macro economists. So we don't make any progress. We need better communication between the MMT people and the NK people. The MMT people need to kick the RBC/Rational Expectations idea out of the NK realm. It isn't working.
It is easy to see how it came to this. For a long time this issue was about the internal politics of the economics profession, and so attempts were made (as there always are, warranted or not) to bridge the difference, and NK is what resulted. Well, it isn't good enough.
We have to please populations now. Pleasing economists is not good enough. This stuff matters in a big way these days. So now is the time when we need all economists to look very deeply within and admit their faults. Can they do that? Some can and have, and others don't seem to be capable. It is human nature. But we have to keep trying.
Based on your post, I can see why you don't read papers -- because you lack critical thinking skills. Try taking up sociology where logic and coherence are not valued.
DeleteCome on, Steve, stop hiding behind "anonymous."
DeleteNo, actually I'm at the absolute top of the field in terms of critical thinking skills. TOP OF THE FIELD.
DeleteYou cannot beat me. Want to have a contest? I'll beat you into the ground. The problem is that we need judges better than us.
You're an asshole.
Making assertions on the internet doesn't make them true. Your critical thinking skills are so bad you can't figure out that they're bad. Tough luck, buddy, you got a bad draw from the skills distribution. Enjoy sociology.
DeleteAs best i can tell, Williamson is saying that the New Keynesians may have the big ideas (sticky prices, coordination failures, monopolistic competition) but the Chicago Schoolers developed the mathematical tools (DSGE models) and it's the math that's truly important. To Williamson, only DSGE models and similar mathematical tools are real science. The New Keynesians may have demonstrated the existence of various Keynesian frictions and shown that these frictions have important implications for business cycles, but to Williamson that's just "polemics" or even "religion". Real science requires hard math.
ReplyDeleteIn general, his post suggests that Williamson cares about math rather than economics. It's all about "the economic literature" rather than about how the economy works, and I think this use of language is substantive rather than just being typical academic bad writing. Williamson's point about Lucas dabbling in sticky prices (in 2007, BTW) is particularly telling. Based mainly on two sticky price papers, Williamson claims, "I think we could make the case that the influence of Lucas on NK is huge, and that of Ball and Mankiw is tiny." The thing is, Lucas's 2007 paper argued that sticky prices are unimportant, while New Keynesians like Ball and Mankiw argue the opposite. Williamson doesn't even think that's worth mentioning! Despite this important substantive debate about the importance of sticky prices, Williamson sees no real difference between the two camps, because they both use mathematically similar models!
It isn't a substantive debate. Lucas-Golosov shows that, given the distribution of firm prices, lots of firms seem to be near the threshold of adjustment and therefore the aggregate price level will move a lot. It doesn't at all argue that sticky prices "don't matter". Ball and Mankiw had no data on the price adjustment process at the firm level, and therefore were left to argue that sticky prices "matter" if they result in a slow to adjustment price level. You really aren't very smart, are you?
DeleteYou don't seem to understand the implications of what you wrote. Your summary of the paper ("the aggregate price level will move a lot") is that prices aren't very sticky. Of course, this is one reason why sticky prices might not matter.
DeleteMore importantly, even if you don't understand what they're saying, Lucas & Golosov clearly state that sticky prices don't matter. They write: "In none of the simulations we conducted did monetary shocks induce large or persistent real responses."
It's always best not to feed the trolls ...
DeleteRagout, it is really sad that you know so little as to miss the point entirely. I pity your children, as they will grow up with little or no intelligent discourse in their house.
DeleteEconomists do not seem to worry much about using words consistently. Perhaps this is because non-math is never really clear anyway, but I suspect the casual attitude towards prose leads to unnecessary confusion. "Sticky prices" is a prime example. The observations described in Kehoe and Midrigan's "Prices are sticky after all" are almost exactly the same as those which led Eichenbuam, Jaimovich and Rebelo (2011 AER) to remark “nominal rigidities are important, but they do not necessarily take the form of of sticky prices…”
ReplyDeleteAnnoying though it is, this is not merely stupid. The prices in Calvo-style models are clearly "sticky" -- firms would like to change them sometimes, but the damn things just won't budge. This is not so in menu-cost models, or in reality; but maybe the stickiness image is close enough to be useful in any world where price change is slow. Or maybe not. The varying usage of the terminology may reflect varying opinions on that question.
Perhaps we could use a professional jargon policing committee, kind of like astronomers have to decide what is a planet. Until then, you just have to read the equations and accept that every author with some fame gets to pick whatever language he or she prefers.
"Until then, you just have to read the equations and accept that every author with some fame gets to pick whatever language he or she prefers."
DeleteCapital in neo-classical economics is another prime example of poor epistemology. You are right, economists do not take prose seriously. The discipline needs some Derrida and Critical Theory if they are going to seriously answer questions about why they call things what they do.
Are prices really all that sticky? In the real world, over the past 30 plus years, firms have reacted to downturns in their businesses by mass layoffs. Even in the utility industry , employees have been re-engineered out of existence or used as "stored merger savings," to be let go in order to achieve the efficiencies of scale inherent in the merger. After these periodic purges, firms can rehire at lower starting salaries. Is the problem with the definition of sticky that this does not happen instantaneously, or you haven't specified multiple rounds of layoffs and price changes that take time to wind through the economy? Are the prices of final products sticky when confronted with a change in demand?
ReplyDeleteLong ago in a galaxy far away, a government or central bank or something said that, since trillions of dollars hinged on getting the macro model right, and since they thought pricing behavior was central to that mission, they were going to spend what it takes to get sufficient empirical data. So they set up a monitoring system, with a huge sample a firms, regular surveys of price expectations, actual price data, etc. The whole thing ended up costing billions, but since the costs of poor policy were so much greater, they still thought it was a good idea.
ReplyDeleteIn this galaxy, I think it’s a tempest in a teapot. Price flexibility as well as stickiness can be destabilizing where agents’ behaviors are interactively determined, or where agents are boundedly rational, no? What about all the work on wage flexibility as an amplifier of cyclicality?
The problem with microfoundations remains the same: bad micro.
I shall follow up on Peter's remark with some additional stuff. From the standpoint of Post Keynesians, much of this would look like a tempest in a teapot, if it were not for the fact that so many claim that some sort of NK model associated with DSGE models is somehow the currently dominant macro model, with even Noah apparently agreeing with this once one includes those throwing in "financial frictions."
DeleteSure, it is true that sticky prices will allow more Keynesian like macro policies than will some old fashioned pure RBC model with single unique equilibria that are stable. But, Keynes himself emphaaized that his theory held for a world of price flexibility, and as Peter notes, models with price flexibility are not necessarily more stable than those with sticky prices.
Those sorts of models can be derived from Minskyan foundations, and many shortly after 2008-09 thought this was the way to go, but what has come out of that has been adding fin frictions to sticky price DSGE NK models. It looks like Noah in particularly is probably in agreement with SW that this is a good thing and keeps all those nasty angry hets at bay and in their non-serious place, whew! They agree on this, even if they (and some seriously infantile Anonymities) are jerking around all over each other regarding the history of these NK sticky price models.
Barkley Rosser
"sticky prices will allow more Keynesian like macro policies"
DeleteIndeed. Since Keynes ideas were first implemented in response to the Great Depression (and worked!) they have been attacked. Alternative ideas have been generously funded and supported by wealthy agents who don't like the "redistributionist" attributes of Keynes.
They are many ways to manage and economy and many paths to a desired goal. Economists differ in their values. Some economists value lower wealth inequality and some economists place much greater value on the ability of an individual to capture and control great sums of wealth. Economists with one set of values might prefer the path suggested by sticky price models. Other economists might so abhor the path suggested by sticky price models that they reject the model as undesirable because it does not match value. At root, the argument is about values but it is considered rude to discuss values.
-jonny bakho
What? You mean things like "culture" and "politics" matter???
DeleteAnyone else read the Mankiw Ball paper and feel like they were reading modern Paul Krugman? There's even a really snarky Krugman quote in the paper itself.
ReplyDeleteI wish Mankiw would blog more.
I also wish he would.
DeleteYes, you are confused. Also, fuming, I think.
ReplyDeleteWell, I'm enjoying myself, and that is what matters. :-)
DeleteExcellent. Me too. Blaming me for your confusion is of course a standard rhetorical trick. This is one instance where age actually gives me an advantage. I actually lived through all this stuff - saw Ball and Mankiw presented (by Ball), with Cooley discussing, and he said about what Lucas did. And I'm not walking back on anything I wrote. I think it's quite accurate.
DeleteI am just amused by the quantum superposition of scorn and ownership that seems to characterize freshwater attitude towards New Keynesian models...
DeleteAlso I never knew there was so much animosity against Mankiw among the freshwater. That's interesting. I'll have to dig deeper into that history...
"Scorn" "animosity" "freshwater attitude"
DeleteThere's no scorn or animosity. That's all in your mind. And who are those freshwaters anyway? You think this is some kind of club, or what? I'm not some representative of the Loyal Order of Water Buffaloes. You're the one on the scornful rant, apparently. Why so excited?
Williamson being scornful:
Delete"[Ball and Mankiw] reads like a religious polemic", and is "hardly illuminating".
Williamson quoting Lucas's scornful rant about Ball and Mankiw doing ideology rather than economics at length, approvingly.
Williamson being condescending:
"Ball and Mankiw could do a lot better if they put their minds to it."
Perhaps Williamson is referring only to one particular paper rather than criticizing the authors themselves? No. Williamson also says the case could be made that influence of Ball and Mankiw on New Keynesianism "is tiny."
Noah,
DeleteWe get confused when we're using the wrong model. Your model has two warring factions, good guys and bad guys, now one side has the upper hand, now the other side does, etc. You should consider the possibility that, in spite of all the human frailties involved, these people aren't really in opposition. They're just trying to figure things out. So, since you're so into getting rid of bad models, get out your sword, Link, and do what needs to be done.
:-)
DeleteRESPECT for the Zelda reference.
DeleteSteve Williamson being scornful:
Delete"Summers wasn't acting as the promoter of some well-developed research program. Indeed, [secular stagnation] seems to have grown in Summers's brain and emerged from his mouth fully-formed."
Needless to say, Williamson doesn't explain why Blanchard & Summers' 1986 article on hysteresis, DeLong & Summers' 2012 article in BPEA, or the 2014 CBPP brief (and numerous reference therein) by Ball, DeLong, and Summers don't constitute a "well-developed research program."
Let's get this straight: NK models is basically Ramsey-Brock-Mirman with the Calvo counter. McCallum in his 1989 textbook also showed that a slight re-interpretation of the Euler equation could render the Ramsey model close to the IS-LM. No Lucas needed here. SW seems to want to re-write history.
ReplyDelete(Eating popcorn.) I'm struck by how many hotshot economists here can't post under their own names. It reminds me of the vicious little idiot-savant dweebs on the 'Job Market Rumors' website. Williamson, bile and all, deserves credit for engaging. The rest of you clowns command no respect at all. -- MaxSpeak (a.k.a. Max Sawicky)
ReplyDeleteSteve has a sense of humor and can take a little friendly teasing. The EJMR people are just GamerGate with less passion.
DeleteEMJR works at the level of 8-year-old boys in the schoolyard. Even the "rumors" are typically 90% fiction. Noah does in fact command respect, and can be open to persuasion. He has some strange heros, but at least sometimes breaks away from the blogosphere echo chamber.
DeleteAwww, shucks. :D
DeleteJust trying to be unbilious.
DeleteWell, putting aside the inside baseball and trying to focus on the substantive issue, I think Noah is far too rah-rah for sticky prices models. Sure, they're real and they matter some, but not that much.
ReplyDeleteIn the classical model, all working people are day laborers with no savings or family or public safety net. So they work no matter how little you pay them, and employers react to declines in their income by paying less.
What are called "frictions" are everything about the real world that differs from that model. I understand that economists need to come up something that can be mathematically represented. And it seems sticky prices can be mathematically represented more readily than any of the other countless ways reality differs from the classical model.
So economists have made sticky prices into a big thing, and Noah is writing on Bloomberg paeans to the heroic strugglers for sticky price truth who came before him. It's overdone.
Recessions are sharp decelerations of credit expansion. Sticky prices don't explain them, but do help explain some of the things that happen during them and exacerbate them. The problem with New Keynesians is they used sticky prices to comfort themselves that they were solving the business cycle problem, when all they were really doing was working on explaining some of the characteristics of recessions. Behind that they took for granted Lucas' false dogma that recessions are stochastic. And still do.
Did Keynes blow up the Classical model or add "friction(s)" to it?
DeleteDid Keynes blow up the Classical model or add "friction(s)" to it?
DeleteI would describe what he was doing as adding frictions. I don't think anybody wants to completely "blow up" the classical labor market model, which is just a standard model of a market.
DeleteBut the main point I'm trying to make is that labor markets are getting progressively more complicated and difficult to model. The New Keynesian model that puts all unemployment during recessions down to sticky wages is as outdated today as the classical model was in Keynes' day. I read too much daft pondering how sticky wages can explain why it took so long to re-employ 9m unemployed. It can't, of course. There are a lot of other reasons why labor markets differ from the classical model.
"I would describe what he was doing as adding frictions."
DeleteNo, it was much more radical and revolutionary than that. Really true Keynesianism is not compatible with Classical economics. The ongoing problem has been that people have tried to make the General Theory compatible with Classical Theory, when both offer two very different interpretations of the economic universe and methodologies to go about explaining it. Keynes has been greatly misrepresented since Hicks and Samuelson.
I think you're just stating the post-Keynesian general attitude towards the neo-Keynesian synthesis, rather than examining this particular issue. Keynes' choice of terminology, "frictional unemployment" implies exception/adjustment to an implicitly frictionless classical labor market model. Nobody thinks the labor market isn't a market. Everybody has built on top of classical models.
DeleteI think Tom is really onto something here.
DeleteThough, not being an econometrician myself, I've lately been wondering if a combination of balance sheet effects, reversion to mean trend of housing stock (and thus dramatic decline in residential construction investment), and a pro-cyclical model of business investment, along with sticky wages, aren't entirely sufficient to explain the recent slow rate in which we've been getting those 9m unemployed to become re-employed.
That and too low inflation...
NK macro pre-dates Woodford. I would trace it back to the 1968 Phelps volume, though it wasn't until the 1970's and 1980's that economists started distinguishing between NK and NC models.
ReplyDeleteTwo questions:
1. What did Woodford add to NK macro? (Not a rhetorical question.) My (provisional) answer is that he built a NK model where we could talk about central banks setting a nominal rate of interest, rather than a nominal stock of money, and (many) central bankers liked talking about monetary policy this way.
2. Is Woodford's "cashless" economy a model of a monetary exchange economy or a model of a barter economy? I think it only makes sense as a model of a monetary exchange economy. Steve (I think) sees it as a model of a barter economy with sticky prices, and thus an RBC model with sticky prices. How do you see it, Noah?
My guess is that the second question is at the root of the disagreement.
Nick are you serious? What on earth is the top monetary economist doing wanking around with a barter economy? What are you doing arguing about it - surely this is a red-herring from the start? To non-economists reading this it is just surreal. The farce just does not seem to get any better!
DeleteMaybe this is where all this sticky price stuff is coming from?
Anonymous: unfortunately, I am serious. I think it is a model of a monetary exchange economy, and that the model would have very different results if we assumed that barter was easy (even if barter had to take place at the same relative prices given by the sticky nominal prices allowed by Calvo's fairy). But I am not sure everyone agrees with me on that point.
DeleteI take it you agree with me, but think the point is so obvious that it's not worth making? I wish it were that obvious to others, but I don't think it is.
Cleary what is needed now is for that well-known LSE economist, "Sticky Fingers" Mick Jagger to show up and adjudicate this. He could be especially useful in dealing with the Anonymous incendiaries from EJMR, becoming a "Street Fighting Man" to make them feel no "Satisfaction" whatsoever.. :-).
ReplyDelete(Ex-student rant)
ReplyDeleteWhen I studied undergraduate macro I was given Williamson's undergrad macro textbook, and I thought it was a good book. I can see that he is consistent with what he chooses to teach undergrads in the book and with what he preaches. I have also followed you econ and finance bloggers closely for about three years now (Noah, I have followed you closely especially), and while econ blogs are a great source of educational material and for major updates on the evolution of the theories and models for non-economists, I sometimes find myself so overwhelmingly confused by what economists are trying to say, that similar to Ricardo Caballero's view on DSGE models, I find the reasoning of economists themselves "mesmerized with [their] own internal logic that it has begun to confuse [the hell out of everyone]"
I know there's enough discussion about the state of macroeconomics, but from the point of view of an outsider who aspires to be an economist one day, if what goes on in the blogging sphere is any decent proxy of what goes on the the field of macroeconomics, I think something might definitely be wrong about the way economists have come to explain modern economics to the public and to themselves. And it is really frustrating for us aspiring economists. No one asked me and no one cares, but I like Krugman's blog not for his reputation or fame, but for the simplicity and objectivity of his reasoning, even thought he may be wrong about a lot of things.
But maybe econ really isn't for amateurs.
Anyway, I feel that economists are getting to a point where group therapy would actually be helpful in guiding their ultimate objectives of developing better models of the economy. At this point I am so confused that I might need to go back to zero and pick up a new undergrad econ textbook. My first dilemma will be, which one to pick?
The therapist might be able to teach a few people how you look at a problem and go about solving it. No rational expectations here.
DeleteBarro
DeleteBarro
DeleteAre prices sticky? With more and more commerce moving to the net, with comparison pricing web sites like Kayak, with everything in stores using sku numbers and single price labels on the shelf, and so forth, clearly not anymore in any meaningful sense, which means it may be time to change the model.
ReplyDeleteAs to the barter analogy, with comparison shopping web sites increasingly acting as brokers, why yes, that makes sense.
I don't know about airline pricing, but it is pretty dang clear that prices in labor and housing markets are sticky, and that that matters.
DeleteReally? Not as sticky as they were.
DeleteAre prices sticky? With more and more commerce moving to the net, with comparison pricing web sites like Kayak, with everything in stores using sku numbers and single price labels on the shelf, and so forth, clearly not anymore in any meaningful sense, which means it may be time to change the model.
ReplyDeleteAs to the barter analogy, with comparison shopping web sites increasingly acting as brokers, why yes, that makes sense.
Look at how much of real estate price is land rent (i.e., 100% economic rent). As any one can observe, land rents are amongst the stickiest of prices. Land can cheerfully hold out while capital rusts and labor starves.
ReplyDeleteJ-Lib