A Disturbing Sentence in a Disturbing Journal Issue
From the Recommendations for Further Reading column by Timothy Taylor in the Journal of Economic Perspectives fall issue. I eagerly look forward to this regular feature, which was started by the late Bernie Saffran, the beloved Swarthmore economics professor. My economics blogging began in large part as an attempt to mimic this column.
Chari responds…A useful aphorism in macroeconomics is: ‘If you have an interesting and coherent story to tell, you can tell it in a DSGE model. If you cannot, your story is incoherent.’
Very apropos the discussion of theory X and theory Y.
If you need proof that DSGE models are to understanding the economy what the lamp post is to the drunk with the lost watch, read the main articles in the fall JEP. Bob Hall, who sometimes has a clue, fails badly. Next comes Michael Woodford, who is one of the prime examples of a lamp-post looker. Finally, we get Lee Ohanian, who deserves a few points for expressing humility.
One empirical observation that runs through these articles is that the spread between Baa corporates and treasuries (a measure of financial distress) came back down in 2009, but unemployment remained high. However, Ohanian is the only one who makes a big deal out of it. I, too, would make a big deal out of it, although I do not buy into Ohanian’s attempt at broader empirical analysis.
I would love to see Scott Sumner’s response to this (from Ohanian):
the Depression was indeed “Great” before any of the monetary contraction or banking crises…occurred.
Please, Scott, I hope you aren’t going to tell me that the answer is rational expectations.
Anyway, if you want an idea of where I think the lost watch can be found. see my earlier Rant Against Monetarism.