Blanchard’s “Policy Model” v “Theory Model”

Back in November last year, Professor Olivier Blanchard discussed with me about his view that there should be four types of macroeconomics, and “theory models” like DSGEs is just one of them. Here is the conservation: Q: In your paper “Do DSGE Models Have a Future?” , you have mentioned one of the problems of DSGE models is that it is difficult to be used for communicating with laymen. Why can’t we have some simple and stylized DSGE model, and use it to discuss with non-economist? B: As I have said in the note, you cannot have one model for … Read the whole thing…

#WITGT21 Paragraph of the Day 

By Simon Wren-Lewis: What is hardly ever said, so I make no apologies for doing so once more, is that macroeconomic theory has in some ways ‘had a good crisis’. Basic Keynesian macroeconomic theory says you don’t worry about borrowing in a recession because interest rates will not rise, and they have not. New Keynesian theory says creating loads of new money will not lead to runaway inflation and it has not. Above all else, macroeconomic theory and most evidence said that the turn to austerity in 2010 would delay or weaken the recovery and that is exactly what happened. … Read the whole thing…

Bernanke on Trump’s Fiscal Policy 

Ben Bernanke has a new blog post on Brookings. The focus of the post is to explain “the large difference between the reactions of the Fed and the markets to the change in fiscal prospects since the election”. What is interesting to me is his view on the potential effect of the Trumpian expansionary fiscal policy. Here is one bit: When I was Fed chair, I argued on a number of occasions against fiscal austerity (tax increases, spending cuts). The economy at the time was suffering from high unemployment, and with monetary policy operating close to its limits, I pushed … Read the whole thing…

The Economist to Economists: It’s Politics, Stupid!

This week’s Free Exchange Column is about afterthought of last week’s AEA Annual Meeting. The main message of the piece is that economists should consider other factors in their models. And, Politics is one of the most urgently needed elements which economist should add to their models. Perhaps the greatest omissions were the questions not asked at all. Most dismal scientists exclude politics from their models altogether. As Joseph Stiglitz, a Nobel laureate, put it on one star-studded AEA panel, economists need to pay attention not just to what is theoretically feasible but also to “what is likely to happen … Read the whole thing…

Blanchard: “I would use this model to explain Macroeconomics to my Mum” | #WITGT21 Conversation

This is the sixth installment of our interview series “Where is the General Theory of the 21st Century?” Blanchard on DSGE and the State of Macroeconomics | #WITGT21 Conversation Series | EconReporter Continuing our previous discussion on “DSGE model and the State of Macroeconomics”, Professor Olivier Blanchard further explained the role empirical research on DSGE models, how to teach undergraduates macro after the Great Recession, and his research on hysteresis. (The transcript below has been edited for length and clarity. All mistakes and miscommunications are ours.) Q: EconReporter B: Olivier Blanchard Q: What is the role of empirical work in … Read the whole thing…

Blanchard on “DSGE model and the State of Macroeconomics” | #WITGT21 Conversation Series

Welcome! This is the Fifth installment of our interview series “Where is the General Theory of the 21st Century?” “Where is the General Theory of the 21st Century?” is an interview series which ask top economists a very important question: “Why haven’t economists come up with a new General Theory that can explain the Great Recession?” This is an inquiry into how the macroeconomics academia changed since the Great Recession, and why the responses from macroeconomists since 2008 are different from their counterpart in the 1930s. In this installment, we talked to Olivier Blanchard, now the C. Fred Bergsten Senior … Read the whole thing…

What Macroeconomists seems to agree with each others… according to Blanchard

Where is the General Theory of the 21st Century Cover

After a round of hot debate on the problem of DSGE model and the trouble of macroeconomics initiated by Paul Romer, heavyweight macroeconomist Olivier Blanchard comment on the usefulness of DSGE model, again. Embed from Getty Images But before he discussed the future of macroeconomics, he comes up with a list of things that macroeconomists normally agreed on, and need no further discussions. 1. Macroeconomics is about general equilibrium. 2. Different types of general equilibrium models are needed for different purposes. For exploration and pedagogy, the criterion should be transparency and simplicity, and for that, toy models are the right … Read the whole thing…

What do others think about Paul Romer’s worries… (II)

The discussion on Paul Romer’s “The Trouble with Macroeconomics” continues in the blogosphere, and Simon Wren -Lewis’s “Paul Romer on macroeconomics” is one of the Must-Reads. In his comments, Wren-Lewis said that Romer’s view is extremely valuable. He agrees with Romer that macroeconomists obsessed with the microfounded model, and this practice allows macroeconomists to “cherry-pick” the data to fit the modeling process. …[P]aul’s discussion of identification illustrates how macroeconomics needs to use all the hard information it can get to parameterise its models. Yet microfounded models, the only models deemed acceptable in top journals for both theoretical and empirical analysis, … Read the whole thing…

Paul Romer is worried about Macroeconomics… and what others think about his worries…

Paul Romer’s latest paper “The Trouble with Macroeconomics” is definitely one of the hottest topic in the economics blogosphere. The central message is that Romer thinks the state of Macroeconomics has been going backward ever since the Real Business Cycle Theory and DSGE model took the center stage of macroeconomics. Accroeding to Romer, One of the major issues in modern macroeconomics model is the problem in identifying the so-called “exogenous shocks” in the model: …[M]acroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take, after Kydland and Prescott (1982) … Read the whole thing…

Why Negative Rate is a better policy tool to Higher Inflation Target? Bernanke Explains…

In his latest Brookings blog post “Modifying the Fed’s policy framework: Does a higher inflation target beat negative interest rates?”, Ben Bernanke compares two policy tools central banks can use to stimulate the economy – the hotly discussed idea of Raising Inflation Target and Negative Interest Rate. The TLDR answer is: Negative Rate is the more attractive option to central banks. The reason: Negative Rate is more flexible tool, while changing inflation target takes a lot of effort and time. …Negative interest rates are easy to implement. In practice, central banks in Europe and Japan have imposed negative short-term rates … Read the whole thing…