Tag Archives: Economics

DSGE models — a macroeconomic dead end Both approaches to DSGE macroeconometrics (VAR and Bayesian) have evident vulnerabilities, which substantially derive from how parameters are handled in the technique. In brief, parameters from formally elegant models are calibrated in order to obtain simulated values that reproduce some stylized fact and/or some empirical data distribution, thus relating the underlying theoretical model and the observational...

Economists — people biased toward overconfidence Now consider what happened in November 2007. It was just one month before the Great Recession officially began … Economists in the Survey of Professional Forecasters, a quarterly poll put out by the Federal Reserve Bank of Philadelphia, nevertheless foresaw a recession as relatively unlikely. Instead, they expected the economy to grow at a just slightly below average rate of 2.4 percent in 2008 … This...

The one logic lecture mainstream economists did not attend .[embedded content] Using formal mathematical modelling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. However the validity we get in abstract model worlds does not warrant transfer to real-world economies. Validity may be good, but it is not enough. Mainstream economists are proud of having an ever-growing smorgasbord of models to cherry-pick from (as...

Is economics nothing but a library of models? Chameleons arise and are often nurtured by the following dynamic. First a bookshelf model is constructed that involves terms and elements that seem to have some relation to the real world and assumptions that are not so unrealistic that they would be dismissed out of hand. The intention of the author, let’s call him or her “Q,” in developing the model may be to say something about the real world or the goal may...

The empirical turn in economics Ce qui fait l’unité de la discipline est plutôt l’identification causale, c’est-à-dire un ensemble de méthodes statistiques qui permettent d’estimer les liens de cause à effet entre un facteur quelconque et des résultats économiques. Dans cette perspective, la démarche scientifique vise à reproduire in vivo l’expérience de laboratoire, où l’on peut distinguer aisément la différence de résultat entre un groupe auquel on...

If you have an apple and I have an apple and we exchange these apples then you and I will each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas. George Bernard Shaw Adam Smith once wrote that a really good explanation is “practically seamless.” Is there any such theory within one of the most important fields of social sciences — economic growth? In Paul Romer’s Endogenous Technological Change (1990)...

On models and simplicity When it comes to modelling yours truly does see the point emphatically made time after time by e. g. Paul Krugman about simplicity — at least as long as it doesn’t impinge on our truth-seeking. ‘Simple’ macroeconomic models may of course be an informative heuristic tool for research. But if practitioners of modern macroeconomics do not investigate and make an effort of providing a justification for the credibility of the simplicity...

Macroeconomics and the Friedman-Savage ‘as if’ logic An objection to the hypothesis just presented that is likely to be raised by many … is that it conflicts with the way human beings actually behave and choose. … Is it not patently unrealistic to suppose that individuals … base their decision on the size of the expected utility? While entirely natural and under- standable, this objection is not strictly relevant … The hypothesis asserts rather that, in...

This Fall (October/November 2022) marks the tenth anniversary of the founding of the Review of Keynesian Economics (ROKE). The founding co-editors were Louis-Philippe Rochon, Matias Vernengo, and I. At the beginning of 2018 Louis-Philippe Rochon stepped down to become sole editor of the Review of Political Economy and he was replaced by Esteban Pérez Caldentey. […]

What’s the use of economics? The simple question that was raised during a recent conference … was to what extent has — or should — the teaching of economics be modified … The simple answer is that the economics profession is unlikely to change. Why would economists be willing to give up much of their human capital, painstakingly nurtured for over two centuries? For macroeconomists in particular, the reaction has been to suggest that modifications of...