Lars P. Syll

Price rigidities and unemployment There are unfortunately a lot of mainstream economists out there who still think that price and wage rigidities are the prime movers behind unemployment. What is even worse is that some of them even think that these rigidities are the reason John Maynard Keynes gave for the high unemployment of the Great Depression. This is of course pure nonsense. For although Keynes devoted substantial attention to the subject of wage and price rigidities in General...

DSGE models — a costly waste of time Commenting on the state of standard modern macroeconomics, Willem Buiter argues that neither New Classical nor New Keynesian microfounded DSGE macro models have helped us foresee, understand or craft solutions to the problems of today’s economies: The Monetary Policy Committee of the Bank of England I was privileged to be a ‘founder’ external member of during the years 1997-2000 contained, like its successor vintages of external and executive members,...

So by using a representative-agent, perfect-foresight, complete-markets model, David is ignoring a bunch of things that we know can totally change the answers to the exact policy questions David is thinking about. So what should we do instead? One problem is that models with things like heterogeneity, stochasticity, and imperfect markets are a lot more complicated, and therefore harder to apply in quick or casual way. If we insist on using models with those elements, then it’s going to be...

A moron courting other morons  [embedded content] Living in the U.S. you soon find out that it’s a country with exceptionally many gifted and bright people. But, unfortunately, it is also a country where a moron with lots of money may run for president — and where, sadly enough, a lot of other morons obviously will vote for him …

Krugman’s modeling flim flam Paul Krugman has a piece up on his blog this week arguing that the ‘discipline of modeling’ is a sine qua non for tackling politically and emotionally charged economic issues: You might say that the way to go about research is to approach issues with a pure heart and mind: seek the truth, and derive any policy conclusions afterwards. But that, I suspect, is rarely how things work. After all, the reason you study an issue at all is usually that you care about...

Taking part of the debate on microfoundations among macroeconomists these days, I wonder if Heinz-Peter Spahn isn’t more on the right track than those who desperately offer more or less contrived defenses of the microfoundationalist programme: The crucial point however is: market conditions, which are presupposed in the model of intertemporal choice, are not given in reality. Distributing consumption optimally over time depends on the possibility of individuals to lend money on their...

The money multiplier – neat, plausible, and utterly wrong The neoclassical textbook concept of money multiplier assumes that banks automatically expand the credit money supply to a multiple of their aggregate reserves.  If the required currency-deposit reserve ratio is 5%, the money supply should be about twenty times larger than the aggregate reserves of banks.  In this way the money multiplier concept assumes that the central bank controls the money supply by setting the required reserve...

A small ray of hope I overheard a conversation between two high school students this morning. The first person was asking about which classes the second was going to take next. One of those mentioned was microeconomics. “Oh, that’s easy” said the first, “You just have to remember that it’s all rubbish – they want you to believe that people are rational, and that there’s all this perfection in the world.” “Really?” responded the second, “That’s really dumb. I wonder why they do that?” “It...

Long run demand effects In the standard mainstream economic analysis — take a quick look in e.g. Mankiw’s or Krugman’s textbooks — a demand expansion may very well raise measured productivity in the short run. But in the long run, expansionary demand policy measures cannot lead to sustained higher productivity and output levels. In some non-standard heterodox analyses, however, labour productivity growth is often described as a function of output growth. The rate of technical progress...