Quote of the
Day Last Thirty Years of Economics
From, naturally, Robert Waldmann, chez DeLong, pointing out that the Emperor not only has no clothes, but has been deliberately strutting his lack of stuff since the late 1970s:
Oh another thing — [the problem with economic modeling] isn’t [limited to] new classical macroeconomics. The same criticisms apply to new Keynesian DSGE models. Adding totally unexplained Calvo alarm clocks doesn’t liberate the model from the implausible assumption that there is a representative agent. In fact, the current standard NK model (Eichenbaum, Christiano, Evans, Smets, Wouters) has to add implausible Calvo alarm clock conditional markets to reconcile the assumptions that there is a representative consumer and that there are different types of labor with variable relative wages.
The effort to reconcile DSGE with reality is based on doing whatever it takes to make a DSGE model behave like an old Keynesian model (that is fit the data as old Keynesian models do). Academic macoreconomists ignore the proposal to cut out the middle man who transforms assumptions we don’t believe to implications which we know are valid from empirical research, because we are the middle men and the sensible short cut from what we know to what we know would achieve greater efficiency by eliminating our jobs.