Update: See Gabriel on this here
What's a simple way to graphically demonstrate the three major frameworks of macroeconomic attention to fluctuations? I'm referring to Vienna, Cambridge and Chicago and would like to demonstrate that all three corroborate and contradict each other across a number of key issues.
These 6 questions (and the three answers for each) are mainly to see what it would look like (I'm thinking out loud). The main idea is that you need all three to have all answers to a particular question. This is meant as textbook stuff and very much work in progress. A table is fine, but I wanted something more engaging. Quibbles can be made. But which questions are repetitive? What have I missed out? Are my characterisations unfair? Comments welcome
I quibble.
I would replace "Chicago" with "Minnesota" and "Vienna" with "Auburn" (?).
Also, how come "Vienna" answers "Yes" to "Is the root cause exogenous" and then answers "Yes" to "Are central banks to blame?". Is monetary policy exogenous?
Furthermore, the "Chicago" answer to "Do monetary factors have real effects?" is wrong. You're repeating a stereotype: Prescott and Lucas said that they estimate the effect of monetary factors at 25-30% of GDP volatility. The rest being productivity. -- New Keynesian estimates are in that range too (see recent post my Mark Thoma).
Lastly, rational expectations, equilibrium and the like are modeling strategies, not factual claims, so the question "Are agents fully rational?" is a bit of a red herring.
I would also question the "Chicago" answer to "Are fluctuations a sign of health?"... not all RBC people are Shumpeterians.
Anyway, interesting idea... I'll try something similar. I like visualization and synthesis.
Posted by: Gabriel | May 27, 2008 at 07:43 PM
Gabriel, I was hoping you'd comment so thanks for doing so. I'd be keen to see your own version
I would replace "Chicago" with "Minnesota" and "Vienna" with "Auburn" (?).
MIGHT BE MORE ACCURATE BUT WOULD LOSE SOMETHING IN TRANSLATION
Also, how come "Vienna" answers "Yes" to "Is the root cause exogenous" and then answers "Yes" to "Are central banks to blame?". Is monetary policy exogenous?
EXOGENEOUS... TO A LAISSEZ-FAIRE ECONOMY
Furthermore, the "Chicago" answer to "Do monetary factors have real effects?" is wrong. You're repeating a stereotype: Prescott and Lucas said that they estimate the effect of monetary factors at 25-30% of GDP volatility. The rest being productivity. -- New Keynesian estimates are in that range too (see recent post my Mark Thoma).
IS IT A STEREOTYPE TO SAY THAT RBC IS BUILT ON MONEY NEUTRALITY? ALBEIT HIGHLY STYLISED?
Lastly, rational expectations, equilibrium and the like are modeling strategies, not factual claims, so the question "Are agents fully rational?" is a bit of a red herring.
HMMM... POLICY PRESCRIPTIONS DO STEM FROM TAKING THAT ASSUMPTION TO HOLD, SURELY
I would also question the "Chicago" answer to "Are fluctuations a sign of health?"... not all RBC people are Shumpeterians.
TRUE, I SHOULD RE-WORD. IN LECTURES I SHOW A HEART MONITOR AND ASK IF FLATLINING IS A SIGN OF HEALTH, WHICH RBC AND AUSTRIANS AGREE IS *NOT*
Posted by: aje | May 27, 2008 at 08:16 PM
Properly speaking, RBC is silent on monetary matters.
What Prescott says is that it's wrong to try to have a model of everything, much in the same way it would make no sense to try to build a measuring tool for everything (temperature, length, pressure, etc. -- StarTrek tricorder?).
The baselines RBC model is concerned with employment and output in a properly functioning capitalist economy (in the Walrasian sense). => Even with perfect markets and perfect government (2nd Welfare Theorem), we'd still have about 70% of the volatility we have now, so even in the best of worlds, you can only reduce it by 30%.
(I won't get into the debates on the Solow residual and misspecification and the assumed exogeneity of TFP.)
Re: fluctuations are/are not bad... this is why I hate metaphors and analogies... A risk-averse agent, if asked to pick between a volatile series and its mathematical expectation, will choose the deterministic alternative (without perfect capital markets of course). Also, volatility + credit constraints = bad.
It seems to me that many aspects of the economy have an intrinsically uncertain component (e.g. search markets: labor, marriage, etc.) and while investing in shielding ourselves from it is worth it up to a point (e.g. insurance is good), after that point, there's such a thing as being too cautious, in reference to one's own subjective taste for risk.
Anyway, I think it's awesome that you want to bring up the "big picture". I guess people with a more philosophical bent need that, and the econ. blogophere as it stands, it sort of not doing that...
Posted by: Gabriel | May 27, 2008 at 09:30 PM
P.S. Which one of the Cambridges is that? The UK one?
Posted by: Gabriel | May 27, 2008 at 09:42 PM
I am not sure that the Chicago School truly exists in any important sense any longer. The new neoclassical synthesis builds on the RBC/Chicago-styles models by incorporating nominal rigidities from New Keynesian work and so it largely seems as though the line has been blurred.
The debate is really no longer between New Classicals and New Keynesian, but rather the new synthesis and the Post Walrasians/Austrians/New Institutionalists.
Posted by: Josh | May 28, 2008 at 03:25 AM
Broadly speaking Cambridge = Keynesianism and Vienna = Austrianism, so both UK and US. Regarding the neoclassical synthesis, the background is that it seems to me that monetary policy is being conducted within a pretty stable paradigm (that combines RBC and new-Keynesianism when it suits). The purpose of these graphs is to show that this alliance/coalition is necessary but not sufficient to reflect all schools of thought.
I personally agree that the real dividing line is between New Classicals/New Keynesians on one side and Austrians on the other, but this is an attempt to turn that dividing line into a debate. There are fundamental theoretical conflicts between New C and New K, as there are with A, but if Central Bankers are willing to ignore that in practice, perhaps A can have a seat closer to the top table
Posted by: aje | May 28, 2008 at 10:44 AM