Tag Archives: Economics

The confidence fairy history Brad DeLong has an excellent presentation on the history of the confidence fairy up on his blog. What I especially like with Brad’s history is that it makes it crystal clear how hard it has been for mainstream economists to grasp the simple fact that no matter how much confidence you have in the policies pursued by authorities, it cannot turn bad austerity policies into good job creating policies. Austerity measures and...

David Andolfatto’s DSGE flimflam David Andolfatto — vice president at Federal Reserve Bank of St. Louis — has a post up on his blog trying to defend the much criticised use of DSGE models. According to Andalfatto ‘to help organize our thinking’, it is often useful to construct mathematical representations of our theories — not as a substitute, but as a complement to the other tools in our tool kit (like basic intuition).This is a useful exercise if for no...

Mainstream broken pieces models In economic modeling, people often just assume an objective function for one agent or another, throw that into a larger model, and then look only at some subset of the model’s overall implications. But that’s throwing away data … And in doing so, it dramatically lowers the empirical bar that a model has to clear. You’re essentially tossing a ton of broken, wrong structural assumptions into a model and then calibrating (or...

Economics — spending time doing silly things Mainstream macro theory has not really helped out the finance industry, the Fed, or coffee house discussions. The reason … is basically that DSGE models don’t work … But [if] DSGE models really don’t work, why do so many macroeconomists spend so much time on them? … What if it’s signaling? … That suspicion was probably planted in 2005 … by a Japanese economist I knew … He gave me his advice on how to have an econ...

NAIRU — a long-run equilibrium slippery eel The concept of equilibrium, of course, is an indispensable tool of analysis … But to use the equilibrium concept one has to keep it in place, and its place is strictly in the preliminary stages of an analytical argument, not in the framing of hypotheses to be tested against the facts, for we know perfectly well that we shall not find facts in a state of equilibrium. Yet many writers seem to conceive the...

Paul Krugman — mistaking the map for the territory Paul Krugman has — together with Robin Wells — written an economics textbook that is used all over the world. As all the rest of mainstream economics textbooks, it stresses from the first pages the importance of supplying the student with a systematic way of thinking through economic problems with the help of simple models. Modeling is all about simplification … A model is a simplified representation of...

The anatomy of stock market bubbles  [embedded content]

Having concluded seven years as chief economist at IMF, Olivier Blanchard is now considering rewriting his undergraduate macroeconomics textbook: How should we teach macroeconomics to undergraduates after the crisis? Here are some of my conclusions … Turning to the supply side, the contraption known as the aggregate demand–aggregate supply model should be eliminated. It is clunky and, for good reasons, undergraduates find it difficult to understand … These difficulties are...

Ergodicity and the wrong way to calculate expectations (wonkish) If there was one thing I believed was a reasonable implicit assumption of economics, it was determining the expectation value upon which agents base their decisions as the “ensemble mean” of a large number of draws from a distribution … But now I’m not so sure … Rolling a dice is a good example. The expected distribution of outcomes from rolling a single dice in a 10,000 roll sequence is the...

Visiting one of Helsinki’s many nice cafés and restaurants the other day, I read the following inscription on a mirror and thought Keynes must have been here … Anyhow — slides from yours truly’s keynote presentation at the Kalevi Sorsa Foundation celebration of the 80th anniversary of Keynes’ General Theory is available here.