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1/Here's a follow-up thread about not trusting macro models.
In an earlier thread, I pointed out that permanently low interest rates might have effects on productivity - something that doesn't appear in either standard macro models or macro intuition.
In an earlier thread, I pointed out that permanently low interest rates might have effects on productivity - something that doesn't appear in either standard macro models or macro intuition.
2/Here's an Atif Mian thread about other possible outside-the-model effects of low rates:
3/I learned a bunch of macro models in graduate school. A whole modeling paradigm. Those models were - and are - very dominant in academia.
But in the Great Recession, none of the standard models worked. They all basically failed to predict or describe what was going on.
But in the Great Recession, none of the standard models worked. They all basically failed to predict or describe what was going on.
4/Now, they didn't fail 100%. For example, Ben Bernanke's own models of the "financial accelerator" helped convince him to help bail out the banks, which - though not fair - probably helped avoid a deeper longer recession.
But in general, they did fail.
But in general, they did fail.
5/But I was not surprised that these models failed.
They were massively chock-full of unrealistic assumptions.
noahpinionblog.blogspot.com/2013/05/what-c…
They were massively chock-full of unrealistic assumptions.
noahpinionblog.blogspot.com/2013/05/what-c…
6/The popular models were also linearized, and they generally assumed unique equilibria.
That, plus the simplifying assumptions, meant that any really unusual macroeconomic situation - a financial crisis, a deep recession - was outside their purview.
noahpinionblog.blogspot.com/2013/03/the-sw…
That, plus the simplifying assumptions, meant that any really unusual macroeconomic situation - a financial crisis, a deep recession - was outside their purview.
noahpinionblog.blogspot.com/2013/03/the-sw…
7/This episode taught me that macro models are at best heuristic stories, not ironclad guides to future events.
I had thought that everyone else took away the same lesson, but then along came MMT.
I had thought that everyone else took away the same lesson, but then along came MMT.
8/Suddenly, people who were willing to get in the weeds and criticize the details of mainstream macro models (representative agents! rational expectations! linearity! perfect competition!) are swallowing this far sketchier MMT theory wholesale.
9/And of course I'm being generous in even calling MMT a "theory", since there's no single place where the theory is actually written down. It's not even clear there *is* a theory, rather than some well-known accounting identities and relabeling of stuff.
peoplespolicyproject.org/2019/02/24/wha…
peoplespolicyproject.org/2019/02/24/wha…
10/But anyway, even some people I thought were macro skeptics are swallowing MMT wholesale, and are suddenly willing to bet the nation's future on this vaguely understood possibly-a-theory being perfectly, exactly right.
11/No theory of macroeconomic behavior can consist entirely of accounting identities. There must be behavioral assumptions somewhere in there.
And what if MMT's behavioral assumptions, whatever those are, are not 100% right?
bloomberg.com/opinion/articl…
And what if MMT's behavioral assumptions, whatever those are, are not 100% right?
bloomberg.com/opinion/articl…
12/Remember, one reason standard New Keynesian and RBC models failed is that they were theories made for normal times, and the Great Recession was an abnormal time.
What if, inspired by MMT, we push the economy beyond the region where the theory holds?
What if, inspired by MMT, we push the economy beyond the region where the theory holds?
13/The amazing epistemic confidence of MMT proponents reminds me of Robert Lucas saying "the central problem of depression-prevention has been solved".
nytimes.com/2009/01/05/opi…
nytimes.com/2009/01/05/opi…
14/No macroeconomic model should be regarded as a complete, ironclad description of the way the world works.
No macroeconomic model should be relied upon to make huge extreme policy changes that change the whole shape of the economy.
Period.
No macroeconomic model should be relied upon to make huge extreme policy changes that change the whole shape of the economy.
Period.
15/Even once we understand MMT better - once the "Calvinball" Krugman talks about has turned into a completely specified theory on a page - we *still* should not stake our entire future on the theory - or any theory - being always always always perfectly correct.
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