Tag Archives: Economics

Economics — a rogue branch of applied mathematics A lot of people complain about the math in economics. Economists tend to quietly dismiss such complaints as the sour-grapes protests of literary types who lack the talent or training to hack their way through systems of equations. But it isn’t just the mathematically illiterate who grouse. New York University economist Paul Romer — hardly a lightweight when it comes to equations — recently complained about how economists use math as a tool...

‘New Keynesian’ models are not too simple. They are just wrong. Simon Wren-Lewis has a nice post discussing Paul Romer’s critique of macro. In Simon’s words: “It is hard to get academic macroeconomists trained since the 1980s to address [large scale Keynesian models] , because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems … But DSGE models as a guide for policy are also fatally flawed because they are too...

What can economists know? The early concerns voiced by such critics as Keynes and Hayek, while they may indeed have been exaggerated, were not misplaced. I believe that much of the difficulty economists have encountered over the past fifty years can be traced to the fact that the economic environment we seek to model are sometimes too messy to be fitted into the mold of a well-behaved, complete model of the standard kind. It is not generally the case that some sharp dividing line separates...

Has macroeconomics — really — progressed? A typical DSGE model has a key property that from my work seems wrong. A good example is the model in Galí and Gertler (2007). In this model a positive price shock—a ‘‘cost push” shock — is explosive unless the Fed raises the nominal interest rate more than the increase in the inflation rate. In other words, positive price shocks with the nominal interest rate held constant are expansionary (because the real interest rate falls). In my work,...

Krugman is right — public debt is good! The U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more. But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good...

How evidence is treated in macroeconomics “New Keynesian” macroeconomist Simon Wren-Lewis has a post up on his blog, discussing how evidence is treated in modern macroeconomics (emphasis added): It is hard to get academic macroeconomists trained since the 1980s to address this question, because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems. But DSGE models as a guide for policy are also fatally flawed...

This is not what you think it is. And it is not what I intended to write about, either. I was going to write about Latvia as it is now, after the deepest recession in the world in 2008-9 and an excruciatingly painful front-loaded fiscal consolidation. Has it really recovered, or is it just marking time?But in looking at Latvia now, I find myself drawn to its history. Latvia's unusual response to the kicking it got in 2008 was because of its history. It had a deep recession 1991-3 and a severe...

Consumer prices may not be deflating as quickly as Labour’s electoral chances did earlier this month, but — even after £300 billion of quantitative easing — price deflation for the first time in more than half a century is finally here. The Bank of England continues to throw everything at keeping prices rising at close to their 2 percent target. Yet it’s not working. And this is not just about cheaper oil. Core inflation has also been dropping like a rock. I argued that “deflation was...

No, says The Times' David Smith. He says that the notion that there was a pause in austerity is an "austerity myth".He points to this chart from the Office for Budget Responsibility that shows fiscal consolidation as a percentage of GDP (relative to the 2008 Budget) continuing on throughout 2013 and 2014 and 2015:But the OBR's chart doesn't actually show what I would define as austerity. It shows the size of the government budget as a percentage of GDP relative to...

This chart is pretty wow: Florence Jaumotte and Carolina Osorio Buitron of the International Monetary Fund have some ideas about how the correlation may have been caused: The main channels through which labor market institutions affect income inequality are the following: Wage dispersion: Unionization and minimum wages are usually thought to reduce inequality by helping equalize the distribution of wages, and economic research confirms this. Unemployment: Some economists argue that while...