tag:blogger.com,1999:blog-2546602206734889307.post7112239936531241897..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Rational Expectations and Phillips CurvesMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2546602206734889307.post-38757573223629668252012-03-13T12:30:31.211+00:002012-03-13T12:30:31.211+00:00In which case I am definitely in the second camp. ...In which case I am definitely in the second camp. But you have to ask why most of the profession is in the first, and what you have to do to make macro more eclectic.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-83818121249313382182012-03-13T10:31:56.878+00:002012-03-13T10:31:56.878+00:00While strongly disagreeing about microfoundations ...While strongly disagreeing about microfoundations and ratex, I have greatly enjoyed this back and forth between New Keynesians and their critics.So, first of all, thank you.<br /><br />Simon Wren-Lewis:<br /><i>"I know this is not realistic, but imagine that Calvo (1983) ‘Staggered prices in a utility maximising framework’ Journal of Monetary Economics Vol 12 pp 383-398 had been published a decade or more earlier, as a direct response to Friedman’s 1968 presidential address. Who knows what would have happened next, but it is difficult to imagine the history of macroeconomic thought being worse as a result."</i><br /><br />I think I understand what you are trying to get at, but nevertheless, am tempted to reply that it difficult to imagine the history of macroeconomic thought being worse in any case!<br /><br />And of course, the microfoundations stampede in the 1970s, technically, had little to do with Friedman and Phelps, both of whom had used adaptive expectations, and neither was a fan of Rational Expectations.<br /><br /><a href="http://press.princeton.edu/chapters/p8537.html" rel="nofollow">Ned Phelps</a>:<br />"Unfortunately, the rational expectations models, appearing in the 1970s, sidestepped the problem of expectations formation under uncertainty by blithely supposing that the model’s actors (tellingly dubbed “agents”) knew the “correct” model and the correct model was the analyst’s model— whatever that model might be that day. The stampede toward “rational expectations”—widely thought to be a “revolution,” though it was only a generalization of the neoclassical idea of equilibrium—derailed the expectations-driven model building that had just left the station. In the end, this way of modeling has not illuminated how the world economy works."<br /><br />[ http://press.princeton.edu/chapters/p8537.html ]Hermannoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-46004479572873187592012-03-13T02:59:58.441+00:002012-03-13T02:59:58.441+00:00Waldmann's got it. So does David Glasner.
I s...Waldmann's got it. So does David Glasner.<br /><br />I sometimes think the fundamental divide in economics isn't Keynesian vs. classical, or saltwater vs. freshwater, but between those who see economics as -- definitionally -- developing a family of models of optimization under constraints, which hopefully will turn out to be useful for practical questions but which can only be evaluated by their own internal criteria; vs. those who see economics as the study of the economy, using whatever mix of methodologies seems best suited to the job.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-12984233755240023612012-03-13T00:38:39.065+00:002012-03-13T00:38:39.065+00:00More rudeness
You write (suspected typo elided) &...More rudeness<br /><br />You write (suspected typo elided) "inflation targeting ... delivering the real interest rate we need." I note that the ECB has consistently targetted inflation (at least you are willing to give inflation targetting credit for events in 2005 and 2006. You must conclude that the Eurozone has the real interest rate we need. <br /><br />But the Eurozone suffered a severe recession, currently has extremely high unemployment and appears to be headed for a second dip. <br /><br />I think you meant to qualify the claim with "with the right inflation target, assuming (for some reason) that the target is credible ..."Roberthttps://www.blogger.com/profile/14455788499385673507noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-14238419862064535412012-03-13T00:18:11.615+00:002012-03-13T00:18:11.615+00:00I too have semi defended the rational expectations...I too have semi defended the rational expectations assumption recently. However, the basic advantage I see is that the assumption of rational expectations makes it more difficult (not impossible) for people to tell stories about how their preferred policies are good, because (it is assumed rather than argued) they will influence expectations in a desirable way. <br /><br />Briefly, I think the point is to exorcise the confidence fairy. Less briefly, my reasoning was that, if one is not required to assume rational expectations, one can argue that cutting spending will cause increased growth by increasing business confidence. A model in which businessmen with rational expectations increase investment and production because of a spending cut is not easy to write. My guess is that it would be a model with sunspot equilibria, so anything can change investment. If so the case for expansionary austerity would be identical to the case that what we need is to burn incense to the flying spaghetti monster (which claim is consistent with the rational expectations assumption on models where sunspots can matter). <br /><br />The key question, I think, is not rational vs irrational. It isn't even rational vs adaptive. It is whether we should treat expectations as a policy variable imagining that policy makers can control them as they control, say, the federal funds rate. <br /><br />Then I thought "same for the people who think that expected inflation is just like the federal funds rate" and here we are. I might add, I also thought "this time I won't be very rude in comment" really honestly. But, as I see it, you leave me no choice.<br /><br />Look why not just talk about a monetary authority which targets real yearly GDP. To a million pounds per capital You are simply assuming that a central bank can get the inflation expectations it wants. That rational people will believe its dynamically inconsistent promises. <br /><br />Oddly the last time I remember defending rational expectations was when I tried to explain (to Matthew Yglesias) why Paul Krugman was skeptical about the effectiveness of monetary policy right now. <br /><br />I note again that you have not identified one advance new Keynesians have made beyond Keynes. The alleged examples include speculation about UK consumption some of which, you note, is not incorporated into new Keynesian models yet and none of which has yielded an improved prediction and, of course, the old Phillips curve. The only connection between the old Phillips curve and Keynes is that he warned against believing in it as clearly as anyone could writing before Phillips.<br /><br />You contest Krugman's claim that those who seek microfoundations have had no successes since the critique of the old Phillips curve yet you go back to that again and again. I see no trace of a justification for your disagreement with Krugman in this post or in any other post of yours which I have read.Roberthttps://www.blogger.com/profile/14455788499385673507noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-58727310909311872742012-03-12T14:46:31.364+00:002012-03-12T14:46:31.364+00:00Simon, My negative view of rational expectations d...Simon, My negative view of rational expectations does not mean that I don't think it has an important place in macrotheory, just that it shouldn't be allowed to exclude all other expectational assumptions because anything else violates some axiom of rationality. That's what I meant by a "tyrannical methodology." The assumption should be appropriate to the problem one is trying to analyze, not dictated by some methodological imperative. The deeper problem with rational expectations in my view is that expectations can be self-fulfilling because the equilibrium is itself conditional on expectations in which case rational expectations doesn't get you very far.David Glasnerhttp://www.uneasymoney.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-82074531748468162352012-03-12T14:32:11.180+00:002012-03-12T14:32:11.180+00:00Joe Pearlman is my primary Ph.D. supervisor. Small...Joe Pearlman is my primary Ph.D. supervisor. Small (academic) world.Jason Ravehttp://www.macromattersblog.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-76796631940689768012012-03-12T11:17:06.368+00:002012-03-12T11:17:06.368+00:00Thanks for commenting on my critique, Simon.
But I...Thanks for commenting on my critique, Simon.<br />But I am still not convinced that it suffices to say - as you do - that "we need to model expectations by some means," and that rational expectations should do, just because it allows the macroeconomist to "think about expectations errors in a structural way." A full argumentation for WHY I consider this inadequate is posted on my blog today:<br />http://larspsyll.wordpress.com/2012/03/12/wren-lewis-an-update/Professor Syllhttp://larspsyll.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-44088645494192891442012-03-12T08:40:16.906+00:002012-03-12T08:40:16.906+00:00Economists overvalue rational expectations die to ...Economists overvalue rational expectations die to the absence of big picture. Let's take an example from physics. Particles in a box also have "rational expectations" about their future energy and trajectory. In real world, the processes with particles are irreversable and stochastic. It means that the new trajectory and energy is a pure innovation to any of the particles together with the time of this innovation. However, the overall behaviour of the (closed) system can be described by a few simple relationships between macrovariables (the gas laws). How are the gas laws related to economics? There is a simple answer. The relative distribution of personal incomes (as reported by the Cesnsu Bureau) has not been changing since 1947 (start of measurements). Hence, with all these rational or/and irrational expectations and free will, the final distribution (similar to those in physics, including the energy distribution for particles in a box) of incomes (results of all efforts) remains fixed: <br />http://mechonomic.blogspot.com/2012/01/we-are-going-to-revisit-our-model-for.html. <br />This is a gas law for incomes and thus the economy as a whole. As a direct consequence, there is a simple relationship defining price inflation in developed countries (an Euro Area Business Cycle Network (EABCN) paper http://www.eabcn.org/paper/unemployment-and-inflation-western-europe-solution-boundary-element-method)Ivan Kitovhttps://www.blogger.com/profile/16756147426052505832noreply@blogger.com