tag:blogger.com,1999:blog-2546602206734889307.post304854306973896802..comments2024-03-29T12:16:15.785+00:00Comments on mainly macro: Can heterodox economists constructively engage the mainstream?Mainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger58125tag:blogger.com,1999:blog-2546602206734889307.post-52397090067093883382016-10-05T16:27:03.530+00:002016-10-05T16:27:03.530+00:00You ask "What happens if consumers are told t...You ask "What happens if consumers are told there is a temporary tax increase ? " I don't know the answer to that but I do know what happened when US consumers were told that there was a temporary tax cut. They were told this in March 2009 when the ARRA (Obama stimulus) passed. It included a temporary roughly lump sum tax cut of $400 per year for individuals filing alone and $800 per year for couples, scheduled for 2 years (for employees in employment (wage and salary workers) the cut was applied monthly as a reduced whitholding from paychecks). Notably there were no Federal tax increases during those 2 years. Now one might suspect that the tax cut was not really going to be temporary -- indeed it was replaced with a partial payroll tax holliday for and additional 2 years). But I am going to address a much simpler question. During the 2 years, did US consumers believe (correctly) that the Federal taxes of most US consumers had been reduced. This question was asked in 2 polls. In one 12 % or respondents answered correctly. In the other 8% did.<br /><br />You think that it is sometimes useful to assume rational expectations when considering fiscal policy, because it is unreasonable to assume that people are almost totally clueless about what will happen in the future. This is very odd given the overwhelming evidence of almost total cluelessness abut what had happened in the past (and was continuing to happen every month, month after month).<br /><br />Roberthttps://www.blogger.com/profile/14455788499385673507noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-72083742404967071392013-11-11T23:48:53.892+00:002013-11-11T23:48:53.892+00:00For what it’s worth, Keynes appears to pretty clea...For what it’s worth, Keynes appears to pretty clearly reject the ‘rational expectations’ of ‘representative agents’ as a worthwhile exercise in his response to Viner’s criticism of The General Theory (as quoted by Hyman Minsky in his book, “John Maynard Keynes”):<br /><br />"By uncertain knowledge…, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability waiting to be summed. ” [QJE, pp. 213-14]<br /><br />Thus the use of certainty equivalents,- much beloved by academics- is to practical men a convention, to which lip service may be paid, but which is abandoned when evidence inconsistent with the polite convention emerges. <br /><br />In the face of uncertainty and “the necessity for action and for decision” (QJE, p. 214), we devise conventions: we assume the present is a “serviceable guide to the future” we assume that existing market conditions are good guides to future markets and “we endeavor to conform with the behavior of the majority or the average” (QJE, p. 214). Given these flimsy foundations, the view of the future “is subject to sudden and violent changes” (QJE, pp.214-15). “All these pretty, polite techniques made for a well-paneled Board Room and a nicely regulated market, are liable to collapse” (QJE, p. 215)<br /><br />Also, in The General Theory, “Business men play a mixed game of skill and chance, the average results of which to the players are not known by those who take a hand” (GT, p.150) <br /><br />George Soros obviously <a href="http://www.ft.com/intl/cms/s/2/0ca06172-bfe9-11de-aed2-00144feab49a.html#axzz2kNXWFZaq" rel="nofollow">got the memo</a> Of course, he is no philosopher, and certainly no economist, but one should never underestimate the power of accountability to ground an intellectual exercise in reality.Majorajamhttps://www.blogger.com/profile/12726411902275032723noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-54069897791433528852013-11-11T23:46:47.378+00:002013-11-11T23:46:47.378+00:00Throughout human history, at least as long as ther...Throughout human history, at least as long as there have been market oriented economies, there have been cycles of boom and bust corresponding with credit-fueled speculation into assets financial and otherwise. Without fail during these periods of time, large quantities of savings have been directed toward investment with little or no economic value (or at least, none where no such spigot is wide open), guaranteeing socially expensive losses. In practice, these episodes are of paramount importance to any understanding of the functioning of an economy, both because their answers hold out the promise of more enlightened policy regarding boom and bust, but also because these extremes should be revealing about the nature of things, like a particle accelerator is to physicists.<br /><br />Given that is the case, one might think it meaningful to a post such as this that these most pertinent and beguiling of economic phenomena are entirely <i>inconceivable</i> in a world where RE determines the expectations of representative agents. And yet, this is nowhere to be found in Professor Wren-Lewis’s case for “one of [mainstream economics’] greatest achievements” (granted, that could’ve been damning with faint praise). Something tells me that when Buitler talks about, “Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability”, exactly this is what he had in mind.<br /><br />Of course to the extent that they do, heterodox economists are wrong to focus on RE, in part for the issues raised here. How information is assimilated by the representative agents of represent agent models does not account for the catastrophic model failure of those models nearly so much as the (mis)specification wrought of the original abstraction. Put another way, there's a reason why hoocoodanode counts as sardonic humor.Majorajamhttps://www.blogger.com/profile/12726411902275032723noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-26185188189113965822013-11-09T13:50:14.482+00:002013-11-09T13:50:14.482+00:00Or as Keynes put it, the market can stay irrationa...Or as Keynes put it, the market can stay irrational longer than you can stay solvent.Arvidhttps://www.blogger.com/profile/09334548407396397401noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-36817141774499165512013-04-23T16:03:02.775+00:002013-04-23T16:03:02.775+00:00I agree, if he taught you you might not rubbish co...I agree, if he taught you you might not rubbish concepts you don't personally agree with as BS!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-34501096223791448402013-04-23T14:32:57.750+00:002013-04-23T14:32:57.750+00:00In fact he does teach and is possibly the best mac...In fact he does teach and is possibly the best macroeconomics lecturer Oxford has ever had. Unlike the general disorganisation of the Economics department, his macro lectures are both interesting and comprehensible. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-85635299759484726812012-07-27T16:47:10.613+00:002012-07-27T16:47:10.613+00:00in Godley/Lavoie's SFC models, agents react to...in Godley/Lavoie's SFC models, agents react to changed circumstances with partial adjustment functions. This is consistent with the G/L view that agents act under uncertainty know that they are acting under uncertainty.<br /><br />If such agents aim to consume a target proportion of their post-tax income, and post-tax income falls, they will adjust their consumption, but not by as much as the fall in post-tax income.<br /><br />So a one-off increase in tax to fund government consumption would cause the household sector to reduce its consumption, but by a smaller amount than the amount by which government consumption had increased: GDP would rise.<br /><br />So (in this very simple example) we've got representative agents in the household sector contributing to a rise in GDP precisely because they don't have perfect foresight, and know that they don't.Oliver Rivershttps://twitter.com/maxrothbarthnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-9570428415221757832012-07-27T01:17:34.142+00:002012-07-27T01:17:34.142+00:00On Leijonhufvud, Lars Syll also has a go at me abo...On Leijonhufvud, Lars Syll also has a go at me about that passing remark. I think the problem is that my view of what New Keynesian economics is really about is not sticky wages and prices, or optimisation and representative agents, but about the consequences of having the wrong real rate of interest. (See this recent post of mine: http://mainlymacro.blogspot.co.uk/2012/07/the-zero-lower-bound-and-price.html)<br /><br />In that respect I think Leijonhufvud's criticism of Keynesian (IS/LM) economics as being too obsessed with wage and price stickiness is correct. In addition, I also think his discussion of intertemporal coordination failures in which people’s expectations about long-term interest rates differ from the marginal efficiency of capital anticipate the key role of deviations from the natural rate of interest in NK analysis.<br /><br />So I think why my remarks may seem strange to you and Lars is that I have a different view to you (and probably a lot of NK economists) about what is really important in NK economics. I would also argue that my view is consistent with the writings of Michael Woodford, who wrote the book on NK economics, but I have no idea if he would agree.<br /><br />The problem with this kind of thing is that it is very easy to see what you want to see when reading others work. What is really important (to me, anyway) is the ideas, and not who was thinking what when.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-65473395721182792092012-07-26T19:08:53.732+00:002012-07-26T19:08:53.732+00:00No with all respect, Simon, i can´t really underst...No with all respect, Simon, i can´t really understand how Axel Leijonhufvud could be called a New Keynsian in either in his early years<br />or in more recent work.Here is some from Axel well worth notice. <br />Axel Leijonhufvud: Debt: Inflation and Austerity http://www.youtube.com/watch?v=90zLGjQr6jo<br />Ouside The Mainstream: An interview with AXEL<br />Leijonhufvud<br />http://www-ceel.economia.unitn.it/staff/leijonhufvud/interview.pdf<br />Leijonhufvud, Axel The Wicksell Connection: Variation on a Theme. http://www.econ.ucla.edu/workingpapers/wp165.pdfJanhttps://www.blogger.com/profile/13321416654318469280noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-38186604010327923222012-07-26T09:48:25.918+00:002012-07-26T09:48:25.918+00:00I think the reply "a combination of ad hoc em...I think the reply "a combination of ad hoc empiricism and specific institutional knowledge" is perfectly sensible, and think any macroeconomist who, faced with this question, would think only in terms of formal models and would ignore these approaches is going wrong. But it strikes me your approach has similar sorts of shortcomings as mainstream economics. <br /><br />As far as I know, ad hoc empiricism is not any better at supplying a guide to the future than those supplied by an appropriate DSGE model. <br /><br />And what do you do with your specific institutional knowledge? You have to insert it into some kind of model of the world, albeit an implicit informal model. Again, this isn't necessarily a bad thing: doing so can allow us to think about things that we are incapable of modelling formally. At the same time, isn't your implicit formal model populated by representative agents of a sort? <br /><br />[like others on this thread, I think a good answer to this question might require more than a single representative household - a model that allows you to think about different kinds of household getting taxed and/or spent on]Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-76785881656794277852012-07-26T08:00:19.203+00:002012-07-26T08:00:19.203+00:00I'm an economist. Well, a Master student. Whet...I'm an economist. Well, a Master student. Whether I qualify as heterodox, <strong>shrug</strong>. If "orthodox" means "using only equilibrium models and letting them define what you can study," then I'm heterodox. But that's an unkind demarcation of the central tradition, which most people working it would not accept.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-73850351237269120102012-07-26T06:48:42.788+00:002012-07-26T06:48:42.788+00:00Prof Simon, Your ask, “what . . . the impact of a ...Prof Simon, Your ask, “what . . . the impact of a temporary increase in government spending, financed by taxes, would do to output in an open economy.” That seems to be your central question. As self-appointed spokesman for the heterodox community, my answer is thus.<br /><br />If the objective is stimulus, what on earth is the point of raising taxes given that the effect of the latter is deflationary (or “anti-stimulatory”). I.e. why not just create new money and spend it (and/or cut taxes)?<br /><br />How’s that for an extreme heterodox view?Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-5058906120594624732012-07-26T01:41:23.575+00:002012-07-26T01:41:23.575+00:00In my day job, I do non-macro but related research...In my day job, I do non-macro but related research, but I have started dabbling in heterodox modelling, similar to the models in Godley & Lavoie's reprinted text. (Or Steve Keen's.) My comment echos those given above - the problem as you state largely assumes a mainstream DSGE-like economy. Thus, a DSGE-style model is best fitted to give an answer, by construction.<br /><br />- You do not specify how the government spends, only that its consumption implicitly can replace consumer sector consumption. This really only makes sense in a single-good economy. A stock-flow consistent model (SFC for short) aggregates spending by sectors, but the real economy effects are implicitly aggregated across varied goods. Changing the composition of spending will have distributional effects. (My last toy economy model is highly sensitive to a switch in the composition in spending, which cannot be captured in a single-good economy model, or the "continuum good" Calvo-style models, where the infinite number of goods are integrated down into a single good.)<br />- You do not specify the structure of the tax, and it is unlikely to hit capitalists and workers equally. This is OK for a representative agent model where there is only one consumer, but won't work once we start splitting up the consumer sector into workers & capitalists (for example). The SFC models have parameters akin to a propensity to save for sectors (and subsectors), but they are meant to be averages. How the tax is structured will affect the observed impact on spending.<br />- In a DSGE model, the fact that the tax is temporary fits directly into the model structure. Other than a few exceptions (e.g., corporate reactions to temporary changes to depreciation allowances), there's no compelling evidence that a tax being temporary has any impact on real world consumer behaviour, so nobody embeds that distinction into the model structure. (If you look at the U.S., there is a big political fight over "temporary" tax cuts ending. It seems naive to assume that saying a tax hike is temporary will be viewed as a credible commitment.)<br />- The SFC models I have seen work on tax rates, not dollar tax amounts, so there is no easy way to determine what is a fiscally neutral change.<br />- I seriously doubt that a currency level (price) would react to this sort of news (unless it was very large). However, the relative propensity to import will be affected by changing the mix in spending from consumer to government. The outcome thus depends on having information on the structure of imports.<br />- I'm not an expert on DSGE modelling, but I've never seen anyone actually solve the nonlinear model with its fancy-pants microfoundations. They invariably wave the magic "log-linearisation" wand around the trivial solution with no dynamics. They end up with a linear model that can answer sensitivity questions like this. In all the SFC models I've played with, my objective was to start off at an unstable equilibrium and then end up with business cycle dynamics. The sensitivity of the model to an input depends on where you are in that trajectory.<br /><br />The summary answer: it depends. We need to have information akin to the "multipliers" to determine the response.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-27422829922905111292012-07-25T23:27:13.602+00:002012-07-25T23:27:13.602+00:00Let me admit I am side stepping your question, but...Let me admit I am side stepping your question, but I think it is the most honest response I can offer. As a heterodox economist reading comments and responses over the last few posts, I felt compelled to accept your challenge and play the game. I believe your posts, and engagement in the comments section, are completely sincere so I don't call it a "game" to denigrate your efforts, but the priors we take into this conversation prevent it from being a real exchange. What game are we playing? Based on what I see, I am supposed to give an account of the effects of fiscal policy without mentioning people. If I can do so successfully, I have won - a coherent heterodox economics without microfoundations is possible. If I slip up and mention people, I lose, suggesting microfoundations are inevitable.<br /><br />Because I like games, I wanted to play. I thought - Ok, I can do this! He won't find single mention of any type of person! Luckily I realized this game was stacked. It is absurd. I will lose. If you get me talking long enough I'll mention someone - BOOM microfoundations! But this is unfair, and obscures the actual methodological debates at stake. The issue is not whether people, in some sense, exist. The issue is not whether, or how often, we refer to individuals. The issue is how we think about them, and their relationship to the other complex processes that exist in the world.<br /><br />Structuralism in linguistics does not forbid discussing individual speech acts. "Structuralism" in social science does not forbid recognizing the existence of individuals. However, if you want to know how a child picks up a language from mess of sounds they are exposed to, or how individuals work to reproduce a messy economy, structuralism says you start with structures (broadly understood). <br /><br />I'm sure you would find it unfair if the roles were reversed, with heterodox economists suggesting that any reference to structures/institutions in your account of fiscal policy proves that structure-founded economics was inevitable. And you would be justified. Structuralism should not be reduced to "structures exists," as microfoundations should not be reduced to "people exist." All of these terms are loaded. What do we man by structures or people? What do we mean by exist? There are post-structuralist answers to these questions, but please note that the questions themselves are posed by every social ontology. For proponents of microfoundations, the individual has a ontological, epistemological, and/or methodological privilege over the structure. Their social existence is different than the way an institution exists. Structuralists, and a variety of post-structuralists, would disagree. <br /><br />I think you want to make the point that multiple microfoundations exist. That is fine. Heterodox economists who reduce the diversity of mainstream economics to a caricature are wrong and doing themselves a disservice. But just as the existence of multiple variants of fascism does little to placate anti-fascists, the relative flexibility of microfoundations is intellectually interesting, but not a compelling defense to those whose problem is "microfoundations" itself. Internet Miscommunication Warning: I am not suggested any link between fascism and microfoundations - just trying to make clear that the existence of different types of some thing is not a compelling defense when the issue is the thing itself.joseph göner-rebellohttps://www.blogger.com/profile/16966239737843409047noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-76919559414432545962012-07-25T22:18:14.585+00:002012-07-25T22:18:14.585+00:00I'd add that although Simon is receiving lots ...I'd add that although Simon is receiving lots of responses, I am not sure any of them are from actual heterodox economists.wh10noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-68259870514126857022012-07-25T21:03:48.110+00:002012-07-25T21:03:48.110+00:00Time will obviously reduce a debt overhang on its ...Time will obviously reduce a debt overhang on its own as long as you can keep your economy out of deflation (for which fiscal policy enforced full employment should suffice). But insofar as you want to return to the "normal rules of capitalism" as soon as possible (which is, granted, a political statement, but a very popular one), it makes sense to pay attention to how fast you can expect the debt overhang to go away.<br /><br />My main issue with model-consistent expectations, even in models where they are analytically tractable, is that they preclude endogenously generated macroeconomic surprises. If all agents have perfect foresight arbitrarily far into the future, then a macroeconomic imbalance cannot "sneak up on them." And yet in the real world, macroeconomic imbalances come as a professed surprise to economic agents with dreary regularity. This indicates a fundamental problem with model-consistent expectations models.<br /><br />If you are using model-consistent expectations despite this reservation, I think you should at a minimum make sure to check their robustness against introduction of agents with non-model-consistent expectations. If your model blows up under any arbitrarily small volume of trading based on idiosyncratic heuristics (such as the Blanchard model does), then you need to go back to the drawing board.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-58178753487082650822012-07-25T19:05:15.935+00:002012-07-25T19:05:15.935+00:00Typical MMTer style comment. Annoying, abrasive, ...Typical MMTer style comment. Annoying, abrasive, condescending and pointless. Why do you people bother commenting in this way all over the internet? Even your most vocal advocates like Scott Fullwiler and Randall Wray seem intent on ruining their own reputations by acting like fools on the internet. Have you no self awareness?DavidGhttp://why.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-21638756173462249792012-07-25T18:35:53.864+00:002012-07-25T18:35:53.864+00:00I don't think you'd get far with putting L...I don't think you'd get far with putting Leijonhufvud as NK. In a speech last September he said: "Economics has got things backward. We insist on forcing our subject into our preconceived methods - optimization and equilibrium. This creates an utterly distorted view of reality." So no NK there!<br />Robert Clower said in an article in the 1990s that macro econ is trapped in a Walrasian vortex that prevents mainstream macro from being useful. He was arguing for agent-based modeling - different again from post-Keynesian.<br />I do think you may be underestimating just how much of a crisis macro theory is in today. The macro of the future will surely have little contact with today's mainstream macro. Maybe some combination of network theory/ agent based modeling/ stock-flow consistency.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-11368696879070162852012-07-25T18:14:54.489+00:002012-07-25T18:14:54.489+00:00Old Keynesian with stock/flow consistency sounds t...Old Keynesian with stock/flow consistency sounds to me more like Tobin and Brainard and Backus than G&L. I wish some of the PK people would chime in.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-19321861400088438242012-07-25T17:49:13.523+00:002012-07-25T17:49:13.523+00:00Dear Simon,
I am starting my PhD at a heterodox s...Dear Simon,<br /><br />I am starting my PhD at a heterodox school in the fall, and I received my master's in economics from another heterodox school (My macro prof was a student of Leijonhufvud) . Your balanced budget multiplier example's logic seems pretty tight. Maybe I don't understand the debate clearly enough, but the reaction by other heterodox folks about rational agents is bizarre. <br /><br />I was always taught that models were insight pumps or "gadgets" like Paul Krugman calls them. Moreover, I was taught that models are only as good as their empirical validity. Perhaps I had not received a "true" heterodox macro education during my MA, but the IS-LM and the WS-PS model a la Blanchard seem to be useful approximations. Plus, both the IS-LM and WS-PS are close to what Joan Robinson was thinking about with her inflation barrier to full-employment and Abba Lerner's low and high full employment. In fact, Abba Lerner's "Economics of Employment" more or less uses the IS-LM throughout.<br /><br />As a heterodox economist, I guess my approach is somewhat different. I'm not sure if you're familiar with Stephen Ziliak (also my prof) of the "Standard Error of Regressions" fame, but I favor his approach. I would rather criticize the empirical proof than the models themselves. Bad models, like Lucas's, have perpetuated because of statistical significance, and that is what we should all strive to change. And, I'm not interested in playing the victimn- I just want to find mechanisms that make the life's of every day people better!<br /><br />Plus, your reasoning and open-mindedness are what is important. You are a thoughtful and open individual that heterodox folks could use on the team!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-68948620173453339242012-07-25T17:21:51.711+00:002012-07-25T17:21:51.711+00:00We agree on the first point, and if your argument ...We agree on the first point, and if your argument about the ZLB going with a debt crisis is empirical I have no problem with that either. <br /><br />On the fourth point, you seem to be saying that assuming model consistent expectations is OK (unless perhaps after a structural change), but not in the kind of non-linear model you use to describe business cycles. No problem with that, but I am not sure Lars Syll would agree!<br /><br />On the final point, again I do not think we disagree. What I think I would argue is that time may eventually cure a debt problem, and if the government is not going to do anything else to help, stimulating demand while the problem works itself out is better than doing nothing. Martin Wolf puts it well in his blog today (http://blogs.ft.com/martin-wolf-exchange/2012/07/25/getting-out-of-debt-by-adding-debt) for debt financed fiscal expansion, and a balanced budget fiscal expansion offsets the saving by debtors with deficits run by creditors.<br /><br />Sorry for the delay in your last comment appearing. I think it was including the video that made Blogger think it was spam.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-23256463774463248242012-07-25T16:50:30.991+00:002012-07-25T16:50:30.991+00:00Unless my memory is completely wrong, I remember h...Unless my memory is completely wrong, I remember his argument that the price that was basically wrong in a Keynesian regime was the real interest rate, rather than wages or the price level. I think that is very New Keynesian.<br /><br />ON G&L, I've only looked at some stuff, but would it be fair to characterise it as Old Keynesian behaviour with stock/flow consistency?Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-71142560288975535342012-07-25T16:05:46.258+00:002012-07-25T16:05:46.258+00:00Leijonhufvud as NK ? I thought he was against the ...Leijonhufvud as NK ? I thought he was against the idea that sticky prices/wages was "what Keynes meant." Didnt he embrace the "Keynesian" idea of fundamental uncertainty, which surely has no flavour of NK about it. I suppose Roger Farmer has tried to run with that idea, but he is not NK either is he ?<br />As for the original question, I guess the state of the art heterodox PK model now is that of Godley and Lavoie. Have you tried to use that ? I imagine the set-up costs may prevent many from doing it. It would be useful to see a suite of models trying to answer your qn including G&LAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-25081777055627970312012-07-25T15:45:30.434+00:002012-07-25T15:45:30.434+00:00I would argue that, using conventional New Keynesi...<strong>I would argue that, using conventional New Keynesian analysis, being at the ZLB means we have a problem of deficient demand. Hence output is demand determined.</strong><br />We don't disagree on that, since a debt-deflation crisis implies deficient demand. (The converse, however, is not true: Debt-deflation is not the only type of event that gives you deficient demand.)<br /><br /><strong>I do not understand why you say it must imply a debt-deflation crisis.</strong><br />That's black empiricism: A debt-deflation spiral is the only sort of event which has been historically observed to prompt central banks to go clear to the zero bound and stay there for any extended period of time. Imputing a debt-deflation event from the mention of the zero bound in the original question is a historical inference, not a theoretical one.<br /><br /><strong>In my analysis, I do not consider the debtor/creditor question. I think it is a very interesting question to address. Can you can address it without thinking about expectations?</strong><br />I would argue yes. In a severe credit event, enforced savings (enforced by contracts of debt service and amortization - essentially contractually enforced chasing of sunk costs) exceed desired savings. So the private sector has no agency: Its expectations don't matter, because it is <em>forced</em> to save more than it can plausibly be made to <em>desire</em> to either save or invest.<br /><br /><strong>when you do have to think about a case where agents do have to form expectations, what do you assume?</strong><br />Generally that they do the same thing they did yesterday, with minor, opportunistic modification. Until and unless they get a sufficiently strong, sufficiently immediate negative feedback to prompt a wholesale reevaluation of their strategy. The key point here is that wholesale reevaluation of your strategy is costly and uncomfortable, both for individuals and institutions. So unless something drastic happens, you only explore a small parameter space around that strategy, looking for opportunistic improvements.<br /><br />Now, this does not preclude agents from using the same model I am using to obtain their expectations for the future. "Use the model Jake is using to make a forecast" is a valid strategy. But for nonlinear dynamic models that's not model-consistent expectations, because such models typically do not have analytical solutions and do have complex numerical behavior. Which means that the best you can do, if the parent model is to execute in finite time, is to compute some finite number of steps ahead with some finite precision, both of which can usually scale only logarithmically with available computational power.<br /><br /><strong>Suppose in your analysis the government spending was on public works that employed the unemployed, who were neither creditors nor debtors, and it was financed by raising taxes from creditors.</strong><br />It <em>does</em> provide relief for output and employment by raising demand. It wouldn't reduce the <em>debt overhang</em> (to first order - to higher order it does, of course, because the newly employed spend their wages buying stuff from people who do use it to pay down debts).<br /><br />Take the US federal government spending during the last world war: If the war had stopped in 1942, and spending been immediately cut back to prewar levels, it is probable that there would have been a recession, because not enough of the 1920s debt overhang had been rolled back. So you had an economy at (arguably over-)full employment, but the underlying pathology had not been resolved (stock-flow consistency is your friend here - employment and output are flows, debt overhang is a stock).<br /><br />This talk by Richard Koo makes the point very nicely: http://www.youtube.com/watch?v=5zCJy84Yvvo<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-37860889288709836252012-07-25T15:17:20.036+00:002012-07-25T15:17:20.036+00:00Lars Syll gave a list recently: Hyman Minsky, Mich...Lars Syll gave a list recently: Hyman Minsky, Michal Kalecki, Sidney Weintraub, Johan Åkerman, Gunnar Myrdal, Paul Davidson, Fred Lee, Axel Leijonhufvud, Steve Keen<br /><br />I cannot recall reading papers or texts by Akerman or Lee, but I have read at least something of all the others. I was also taught Neo-Ricardian economics when young, so I have read plenty by Robinson, Sraffa, Pasinetti etc. I do not know much about the Austrians. <br /><br />But actually my concern is not what any particular author thought, but with the divide I talked about. Mainstream economists can and in some cases have learnt a lot from some of these authors, and a number of mainstream economists have acknowledged this. (One of these days I want to write a paper arguing that Leijonhufvud was the first New Keynesian economist.) Anyone claiming that mainsteam analysis has nothing to learn from those labelled heterodox would be foolish, in my view. But the corresponding claim, that everything mainstream economists do is flawed because they assume superhuman agents, is just as wrong, and that is the point I'm trying to make.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.com