Can Macro still contribute to policy?

andrew

I found this paper by Mankiw on Reddit (it's quite long, 24 pages) but It's a good read. It charts the progression of Macroeconomics and the development of models and theories by Keynesian and Classical economists. It says that most macroeconomics for the last 40 or so years has been 'scientific' in that it hasn't really contributed to new developments in policy used by governments, rather focusing more on the theoretical basis of models etc. I was just wondering about the extent to which this is true; has macro really already said as much as it can about policy?

BESman

Have you studied macro recently? Its a joke. The whole area is based entirely on assumptions, rigid mechanical models and equations which have absolutely no relation to the real economy. Its a dead duck.

andrew

Yeah, I'm doing Intermediate Economics (2nd Year) and have just started the Macro portion of the course.

Économiste Monétaire

Depends which area of macro you're talking about. New-Classical RBC models: not a lot. Macro-econometrics: read Philip Lane's recent WPs on estimating multipliers of wage and non-wage government expenditure with VARs. Some of the New-Classical stuff has taken a weird jaunt down the stochastic control route.

nesf

andrew wrote: »

I found this paper by Mankiw on Reddit (it's quite long, 24 pages) but It's a good read. It charts the progression of Macroeconomics and the development of models and theories by Keynesian and Classical economists. It says that most macroeconomics for the last 40 or so years has been 'scientific' in that it hasn't really contributed to new developments in policy used by governments, rather focusing more on the theoretical basis of models etc. I was just wondering about the extent to which this is true; has macro really already said as much as it can about policy?

As per the paper. The work of central bankers, say in the ECB, in terms of macro modelling and the work of "scientists" in academics (not a real divide, you can find "engineers" in academic economics departments and vice versa) are radically different. The neo-classical "science" stuff is generally woefully inadequate for policy formation, but then it's not supposed to be about policy formation so this shouldn't be surprising.

Macroeconomics is a very broad church, and covers everything from the most abstract science bits to the most applied econometric models. The macro courses in undergrad don't really reflect this though and tend to give a quite narrow taste of the field.

BESman

nesf wrote: »

Macroeconomics is a very broad church, and covers everything from the most abstract science bits to the most applied econometric models. The macro courses in undergrad don't really reflect this though and tend to give a quite narrow taste of the field.

I actually enjoyed the undergrad aspects of Macro. They keep it practical and interesting so as not to alienate newcomers. Unfortunately it gets a lot more technical, and therefore impractical at postgrad level. Rational expectations anyone????

Flamed Diving

Économiste Monétaire wrote: »

Depends which area of macro you're talking about. New-Classical RBC models: not a lot. Macro-econometrics: read Philip Lane's recent WPs on estimating multipliers of wage and non-wage government expenditure with VARs. Some of the New-Classical stuff has taken a weird jaunt down the stochastic control route.

That was an intelligent and thoughtful answer and I look forward to BESman's riposte.

BESman

Flamed Diving wrote: »

That was an intelligent and thoughtful answer and I look forward to BESman's riposte.

Wages and prices do not change quickly with changes in demand and supply, simple as. Keynesian economics works better in practice, as evidenced by its continued use in most policy making institutions. New classical theory doesn't get a look in because it simply does not have any practical use. They tried to fix something that wasn't broken.

A new classical would say riposte when you can just say answer. But it looks better, right? Just like extremely long winded, differentiated, log linear, linear log, log log equations look better than an IS-LM curve but actually have no use.

Mankiw's riposte says it better that I ever could, on an article he read from the Economist describing Paul Romer's contributions to Growth Theory:

Economist Article: Mr Romer is quoted comparing the building of economic models to writing poetry. It is a triumph of form as much as content. This creative economist did not discover anything new about the world with his 1990 paper on growth. Rather, he extended the metre and rhyme-scheme of economics to capture a world—the knowledge economy—expressed until then only in the loosest kind of doggerel. That is how economics makes progress. Sadly, it does not, in and of itself, help economies make progress.

Mankiw: This passage does a good job of capturing what many applied economists (like me) feel about economic theory: Too much of it is beautiful but useless.

Maybe I don't appreciate the beauty of economic theory sufficiently. I also don't have a well developed appreciation of poetry.

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Flamed Diving

BESman wrote: »

A new classical would say riposte when you can just say answer. But it looks better, right?

No. Your analogy simply doesn't hold, and I am really glad you don't hold any authority in how linguistics should be applied. Doubleplus good, sir! Doubleplus good.

Anyway, wrt to the rest of your post. You're swaying all over the place. You're complaining about modern macro while lauding Keynesian theories. You swear "Keynesian economics" stopped in the 1930s.

Furthermore, only a person with their eyes closed and their fingers firmly plugged in their ears could have failed to notice the swift and sharp drop in retail prices for certain goods once the proverbial poo hit the fan this past year. One simple example, over the course of several weeks the price of a sandwich and a cup of tea literally halved in every shop in my area. You could get a roll in most places for €1.99. What was the price of such goods just a few months earlier? Now I know your will make some attempt to deride my example, such things are sadly predictable. What you failed to understand in your wasted years at NUIG is that the point of failing to disaggregate just which goods are 'sticky' and those which are not helps determine their elasticity to demand shocks. Not all as one big block. So making statements such as:

Wages and prices do not change quickly with changes in demand and supply, simple as.

Is based only on ignorance of what economics says, and what the economy is. And:

Keynesian economics works better in practice, as evidenced by its continued use in most policy making institutions.

Are statements which are not backed up by a single reference, making them worthless. And:

They tried to fix something (Keynesian economics) that wasn't broken.

I guess NUIG don't teach their students about the 1970s?

nesf

Flamed Diving wrote: »

I guess NUIG don't teach their students about the 1970s?

They don't. The history of economic thought over the 20th century isn't on any Irish undergrad syllabus unfortunately.

Flamed Diving

nesf wrote: »

They don't. The history of economic thought over the 20th century isn't on any Irish undergrad syllabus unfortunately.

Ah. That explains it then.

nesf

nesf wrote: »

They don't. The history of economic thought over the 20th century isn't on any Irish undergrad syllabus unfortunately.

Its mandatory in a lot of US colleges I think - and I think in LSE ugrad (didn't do it so don't know) economic history is also mandatory.

Économiste Monétaire

Um, the idea that hydraulic Keynesian IS-LM through graphs forms the basis of policy decisions is delusional. Simulations through RBC and New-Keynesian models are a complement to macro-econometric analysis (and common sense), not a substitute. Base New-Keynesian models à la Taylor/Calvo have price rigidities, by the way. Large DSGE models aren't meant to be a complete and final picture of reality; like any economic model they're built to analyse specific issues in reduced form. Rational expectations is relatively better than the alternative of adaptive expectations--the truth is somewhere in-between.

Time Magazine

nesf wrote: »

They don't. The history of economic thought over the 20th century isn't on any Irish undergrad syllabus unfortunately.

You know where does a bit of it, "The module looks at globalization during the mediaeval and early modern periods; at the links between trade and the Industrial Revolution; at the first great globalization boom of the late 19 th century, and the political backlash which this provoked; at the de-globalization of the interwar period; and at post-1945 liberalization. The links between international institutions such as the GATT , EPU and EEC , and the European growth miracle of 1950-73 will be explored. The module may also examine current policy issues. This section of the module will be continually revised, reflecting developments in the rapidly changing world economy of today."

Économiste Monétaire

Économiste Monétaire wrote: »

Um, the idea that hydraulic Keynesian IS-LM through graphs forms the basis of policy decisions is delusional. Simulations through RBC and New-Keynesian models are a complement to macro-econometric analysis (and common sense), not a substitute. Base New-Keynesian models à la Taylor/Calvo have price rigidities, by the way. Large DSGE models aren't meant to be a complete and final picture of reality; like any economic model they're built to analyse specific issues in reduced form. Rational expectations is relatively better than the alternative of adaptive expectations--the truth is somewhere in-between.

Ignoring the post Keynesians? Tut tut!

Économiste Monétaire

Deleted User wrote: »

Ignoring the post Keynesians? Tut tut!

Intentional :pac:

BESman

Flamed Diving wrote: »

What you failed to understand in your wasted years at NUIG is that the point of failing to disaggregate just which goods are 'sticky' and those which are not helps determine their elasticity to demand shocks.

I don't see the need for such personal insults, why is the economics board so harsh? I don't know anything of your background and would not mention it in any case.

We are just discussing economics, yes?

Économiste Monétaire

Économiste Monétaire wrote: »

Intentional :pac:

At the risk of de-railing the thread, I do find myself somewhat attracted to the work of Godley and Lavoie in Monetary economics - I'm not sold on it yet, but there would appear to be some merit in their approach.

Flamed Diving

BESman wrote: »

I don't see the need for such personal insults, why is the economics board so harsh? I don't know anything of your background and would not mention it in any case.

It was not a personal insult, I was just surprised that your time at NUIG left you devoid of such basic knowledge.

BESman wrote: »

We are just discussing economics, yes?

Yes we are, and for some reason you chose to focus on a tiny sliver of my post to you instead of all the economic stuff. However your contribution to this thread has been less about discussing economics and more about ranting from your soapbox and making sweeping statements. I think this style belongs in the Irish Economy forum.

nesf

Time Magazine wrote: »

You know where does a bit of it, "The module looks at globalization during the mediaeval and early modern periods; at the links between trade and the Industrial Revolution; at the first great globalization boom of the late 19 th century, and the political backlash which this provoked; at the de-globalization of the interwar period; and at post-1945 liberalization. The links between international institutions such as the GATT , EPU and EEC , and the European growth miracle of 1950-73 will be explored. The module may also examine current policy issues. This section of the module will be continually revised, reflecting developments in the rapidly changing world economy of today."

Not really a module on the development of economic thought though.

Flamed Diving

nesf wrote: »

Not really a module on the development of economic thought though.

https://sisweb.ucd.ie/usis/w_sm_web_inf_viewer_banner.show_module?p_subj=ECON&p_crse=20070&p_term_code=200900&p_semester=Semester%20One&p_crumb=%3CA%20href%3D%22https://sisweb.ucd.ie/usis/w_sm_web_inf_viewer_banner.show_major%3Fp_term_code%3D200900%26p_cao_code%3DDN051%26p_major_code%3DECS1%26p_show_prog_link%3DY%22%3E%20DN051%20Economics%3C/A%3E#top

andrew

Économiste Monétaire wrote: »

Um, the idea that hydraulic Keynesian IS-LM through graphs forms the basis of policy decisions is delusional.

Is it used at all, for anything? Even as a basis for other models?

Économiste Monétaire

andrew wrote: »

Is it used at all, for anything? Even as a basis for other models?

My comment was specific to policy analysis being based around drawing IS-LM 'curves' and shifting them around. Short answer to your question: Yes, it forms the basis for macroeconomics as we know it today (Y = C + I + G + NX) and rigidities in the stock New-Keynesian model, which, after some maths, you'll get familiar IS and LM equations and a Philips curve of sorts. Rational expectations is a rather large departure from old-school Keynes, though--'choice under uncertainty' being a theme of the General Theory. Hydraulic Keynesian economics isn't used in policy making; fiscal policy (pushing the G button whenever there's a recession) was supplanted by monetary policy from the 80s onwards as the best means to minimise output gaps (except in the case of massive shocks).

Time Magazine

Économiste Monétaire wrote: »

Hydraulic Keynesian economics

Reference, for those who don't get the joke

nesf

Flamed Diving wrote: »

https://sisweb.ucd.ie/usis/w_sm_web_inf_viewer_banner.show_module?p_subj=ECON&p_crse=20070&p_term_code=200900&p_semester=Semester%20One&p_crumb=%3CA%20href%3D%22https://sisweb.ucd.ie/usis/w_sm_web_inf_viewer_banner.show_major%3Fp_term_code%3D200900%26p_cao_code%3DDN051%26p_major_code%3DECS1%26p_show_prog_link%3DY%22%3E%20DN051%20Economics%3C/A%3E#top

Again, different to a description of how thought has developed over the mid to late 20th century, though learning about the progress from Smith to Marshall etc is undoubtedly worth doing.

Knowing about Smith doesn't really help one put the neo-classical versus neo-Keynesian debate in context etc.

silverharp

Are the ideas from behavioural finance/economics making much inroads? it would seem that the same silliness, crowding in market bubbles occur in policy making. Gordon Brown is very quotable:D

BESman

Flamed Diving wrote: »

I am really glad you don't hold any authority in how linguistics should be applied. Doubleplus good, sir! Doubleplus good.

I never claimed to.

Flamed Diving wrote: »

Anyway, wrt to the rest of your post. You're swaying all over the place. You're complaining about modern macro while lauding Keynesian theories. You swear "Keynesian economics" stopped in the 1930s.

I simply tried to express in my post that modern macro has become a little irrelevant. I admire original Keynesian theory and I understand that it did not "stop" in the 1930s but I associate it with a more "old school" standard of economic thought compared to the direction that modern macro thought has taken in more recent years. The fundamental source of my post was the paper by Mankiw which the thread started with, I presume you read it before you replied to my post. I was simply aggreeing with Mankiw's general feelings on the subject. (Yes, I am a fan of Mankiw so I will accept a certain amount of bias on my part.)

Flamed Diving wrote: »

Furthermore, only a person with their eyes closed and their fingers firmly plugged in their ears could have failed to notice the swift and sharp drop in retail prices for certain goods once the proverbial poo hit the fan this past year. One simple example, over the course of several weeks the price of a sandwich and a cup of tea literally halved in every shop in my area. You could get a roll in most places for €1.99. What was the price of such goods just a few months earlier?

I take your example and I cannot deny that yes prices have dropped significantly. But you claim that this happened in the course of several weeks. Very precise judgement indeed. Is there data out there that can determine just how quickly prices have changed given recent economic developments? It would be interesting to see. My estimation, and this is crude, but suppose we take the poo as hitting the fan around halfway through 2008 sometime, I only noticed the prices of things such as tea/rolls falling well into 2009, so lets say 6 months to a year roughly. Its still a lag is it not?

Your local shopkeeper didn't pick up his newspaper in September 2008 and say "Hmmm, Lehman Brothers has collapsed, better drop the prices of those rolls in the morning." It takes time. People need to lose jobs. Firms cut costs and reduce wages. People lose income and don't buy as much tea and rolls. Shopkeeper looks at his books, sees revenue on his deli counter has dropped and decides to cut the prices of rolls. How long does this whole process take? Impossible to say but I'd imagine more than a few weeks. Minimum 6 months to a year.

Flamed Diving wrote: »

Quote:
Wages and prices do not change quickly with changes in demand and supply, simple as.
Is based only on ignorance of what economics says, and what the economy is.

Why? What does economics say? What is the economy? Enlighten me.

Flamed Diving wrote: »

Quote:
Keynesian economics works better in practice, as evidenced by its continued use in most policy making institutions.

Are statements which are not backed up by a single reference, making them worthless.

Again this is from Mankiw's paper that the whole thread started on. Thats my reference. He clearly states this on numerous occasions in the paper. I did not think I would have to point that out because I presumed you read the paper.

Flamed Diving

BESman wrote: »

I never claimed to.



I simply tried to express in my post that modern macro has become a little irrelevant. I admire original Keynesian theory and I understand that it did not "stop" in the 1930s but I associate it with a more "old school" standard of economic thought compared to the direction that modern macro thought has taken in more recent years. The fundamental source of my post was the paper by Mankiw which the thread started with, I presume you read it before you replied to my post. I was simply aggreeing with Mankiw's general feelings on the subject. (Yes, I am a fan of Mankiw so I will accept a certain amount of bias on my part.)



I take your example and I cannot deny that yes prices have dropped significantly. But you claim that this happened in the course of several weeks. Very precise judgement indeed. Is there data out there that can determine just how quickly prices have changed given recent economic developments? It would be interesting to see. My estimation, and this is crude, but suppose we take the poo as hitting the fan around halfway through 2008 sometime, I only noticed the prices of things such as tea/rolls falling well into 2009, so lets say 6 months to a year roughly. Its still a lag is it not?

Your local shopkeeper didn't pick up his newspaper in September 2008 and say "Hmmm, Lehman Brothers has collapsed, better drop the prices of those rolls in the morning." It takes time. People need to lose jobs. Firms cut costs and reduce wages. People lose income and don't buy as much tea and rolls. Shopkeeper looks at his books, sees revenue on his deli counter has dropped and decides to cut the prices of rolls. How long does this whole process take? Impossible to say but I'd imagine more than a few weeks. Minimum 6 months to a year.



Why? What does economics say? What is the economy? Enlighten me.




Again this is from Mankiw's paper that the whole thread started on. Thats my reference. He clearly states this on numerous occasions in the paper. I did not think I would have to point that out because I presumed you read the paper.

I have been away valentining my girl for the past couple of days, so I just got to see this. Hence, I have kinda lost the steam for it, anyway, in short I almost agree with much of what you said, but when I said the poo hit the fan, I really wasn't referring to the events on Wall Street in Sept, but the events (or to be more precise, the public hysteria) that directly effected the retailer in Ireland, which culminated around Jan 2009, when everything (GDP/GNP/employment) in Ireland seemed to collapse at once, and the media went on a frenzy. This is when prices truely began to plunge overnight, although the trend does go back as far as July, to be fair.

http://www.cso.ie/releasespublications/documents/prices/current/cpi.pdf

BESman

Flamed Diving wrote: »

I have been away valentining my girl for the past couple of days, so I just got to see this. Hence, I have kinda lost the steam for it, anyway, in short I almost agree with much of what you said, but when I said the poo hit the fan, I really wasn't referring to the events on Wall Street in Sept, but the events (or to be more precise, the public hysteria) that directly effected the retailer in Ireland, which culminated around Jan 2009, when everything (GDP/GNP/employment) in Ireland seemed to collapse at once, and the media went on a frenzy. This is when prices truely began to plunge overnight, although the trend does go back as far as July, to be fair.

http://www.cso.ie/releasespublications/documents/prices/current/cpi.pdf

Point taken. Hopefully all this valentining will help stimulate the economy for a little while at least!:)