Real-World Economics Review

from Lars Syll We can either let theory guide us in our attempt to estimate causal relationships from data … or we don’t let theory guide us. If we let theory guide us, our causal inferences will be ‘incredible’ because our theoretical knowledge is itself not certain … If we do not let theory guide us, we have no good reason to believe that our causal conclusions are true either of the experimental population or of other populations because we have no understanding of the mechanisms that...

from Dean Baker Last week, New York Times columnist Timothy Egan had a piece headlined “Why Doesn’t Mark Zuckerberg Get It?” The piece then goes on to document how Facebook has become a medium for spreading lies and nonsense all over the world, that many ill-informed users have come to believe. This is what Egan wants Zuckerberg to “get.” While it would be nice if Zuckerberg understood the problems created by Facebook, and took effective measures to address them, the problem with Egan’s...

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from Lars Syll David Colander and Craig Freedman’s Where Economics Went Wrong is a provocative book designed to inspire economists to serious reflection on the nature of economics and how it is practiced. It is a book to that seeks to stimulate discussion about the current state of the discipline; it should be read by anyone who categorizes what they do as applied policy work. I agree with much – though not all – of what Colander and Freedman’s write … Reliance on mathematics has obscured...

from Asad Zaman In the Origins of Central Banking, we discussed how the Bank of England was created in 1694 to provide funding for a war with France. The success of this institution was noted, and it was replicated across Europe, so that Central Banks came into existence to finance the nearly continuous wars between European powers that characterized the 18th Century. The 19th Century was unusual in that European powers set aside differences to create a Hundred Years of Peace (1814 to...

from Lars Syll Ed Leamer’s Tantalus on the Road to Asymptopia is one of my favourite critiques of econometrics, and for the benefit of those who are not versed in the econometric jargon, this handy summary gives the gist of it in plain English: Most work in econometrics and regression analysis is made on the assumption that the researcher has a theoretical model that is ‘true.’ Based on this belief of having a correct specification for an econometric model or running a regression, one...

The next post is interesting on different levels. First, interest rates are low and it shows that medium run changes in these rates can to quite some extent be ‘explained’ by a cocktail of:  economic variables, price setting by central banks and expectation variables (mind that the model is straightforward but the variables aren’t!). This, however, does not explain why USA rates are quite a bit higher than (in this case) German rates, even when inflation, growth and unemployment in the...