The finally few posts haven't worked out thence well, that's for sure. After a too-grumpy reaction to Alan Blinder's review, I wanted to say something nice in addition to discovery mutual the world alongside the "what's incorrect alongside macro" articles in addition to fifty-fifty Krugman's posts. In doing thence I was much likewise quick in addition to superficial inwards characterizing what's going on at high levels of our policy institutions. The solely final result was that I managed to annoy all my friends in addition to colleagues at the Fed, IMF, in addition to thence on.
As penance, I'll attempt a weblog postal service that to a greater extent than accurately characterizes the interaction of inquiry in addition to policy, "Keynesian" in addition to modern economics, in addition to thence on, every bit I reckon it.
If nosotros aspect i footstep below the political level, for illustration at the FOMC minutes in addition to what inquiry staff are upward to at institutions similar Fed in addition to IMF, you lot reckon a real sophisticated interaction betwixt the ideas of modern economical inquiry in addition to policy. The FOMC minutes in addition to speeches past times board members (all like shooting fish in a barrel to discovery on the Fed's website) are a swell source. The FOMC seems, to an outsider, like the world's highest-level debating social club on modern macroeconomics.
On many of the dividing lines betwixt traditional Keynesian in addition to modern economics, the policy word is decidedly modern.
Traditional Keynesian economic science is to a higher house all, static. Consumption depends on income, today; investment depends on involvement rates in addition to brute spirits, today, in addition to thence on. This is inwards exercise its swell success. At the time, people didn't receive got the tools to exercise dynamic intertemporal economics.
Now nosotros do. Modern macroeconomics is, to a higher house all, intertemporal. People brand consumption in addition to investment decisions, thinking most today in addition to the future. This intertemporal revolution started alongside the permanent income model, that consumption depends on expected hereafter income, in addition to continues to this day.
(Let me rapidly halt a word that volition spin out of command into quotations from Keynes in addition to what he mightiness receive got "really meant." What matters is what was inwards Keynesian models, used inwards policy for generations, in addition to that's ISLM. Perhaps a deeper reading of Keynes -- or Marx, or Smith, or the Talmud -- mightiness give away some intertemporal poetry. But it actually had lilliputian lawsuit on how models are used or policy was done. So hither "Keynesian" way ISLM-ASAD.)
Now, if you lot read FOMC minutes, Fed speeches, or speak to people at the Fed most policy, you lot volition reckon that this intertemporal, expectation-focused approach resulting from the revolutions of the 1970s permiates the policy-making process. For example, "forward guidance" is the rage. It solely takes i beer for the conversation to rapidly acknowledge that QE probable worked every bit much past times signaling depression involvement rates for a long fourth dimension than it did past times exploiting some sort of permanent price-pressure inwards Treasury markets.
More deeply, the Fed policy word recognizes that "expectations" are non the same things every bit "speeches past times world officials." People receive got heard lots of promises before. Policy faces a deep "time consistency" in addition to "commitment vs. discretion" problem, i time to a greater extent than exercise of the belatedly 1970s revolution inwards macroeconomics. People don't believe promises made now, because they know the Fed may alter its hear later.
This realization led modern macroeconomics to focus on policy rules, rather than policy actions, which nosotros tin chalk upward every bit a 2nd major interruption betwixt traditional Keynesian analysis in addition to modern macroeconomics. Rules tin last written down, legal or constitutional constraints, or merely traditions long observed. The best way to "manage expectations" is non to "manipulate" them alongside speeches, but instead to follow well-established rules -- fifty-fifty when you'd rather not. Friedman's 4% dominion from the 1960s had some of this flavor. Taylor's involvement charge per unit of measurement dominion from the 1990s has it explicitly, in addition to inflation target rules fifty-fifty to a greater extent than strongly.
Over the finally xx years, in addition to especially nether chairman Ben Bernanke, you lot could reckon the importance of transparent, predictable, rule-based thinking accept hold. The early on Fed was deliberately secretive in addition to deliberately obscure. There was a fourth dimension when they wouldn't fifty-fifty say markets what the Federal Funds target was! Since then, explanation of what the Fed is doing, why the Fed is doing it, what the Fed is probable to exercise inwards the future, in addition to finally how the Fed volition react to events inwards the hereafter -- a "state-contingent" dominion -- has drib dead to a greater extent than in addition to to a greater extent than of import inwards Fed discussions.
This mental attitude took a lilliputian footstep dorsum recently; the Fed tried to communicate that involvement rates would rising when unemployment cruel below 6.5%. (Clarification below.) That promptly happened, unexpectedly, forcing the Fed to backtrack in addition to say no, wait, nosotros actually wishing to aspect at broader labor marketplace indicators.
Well, it's difficult to follow rules ex-post. That's the whole betoken of rules! Adopting rules needs major changes inwards what nosotros aspect of policy too. If Janet Yellen had raised rates every bit "promised," in addition to then went to Congress to say "we proclaimed a rule, thence nosotros had to stick to it fifty-fifty though nosotros in addition to you lot both thought the economic scheme way likewise weak to heighten rates," you lot tin imagine the howls.
I'm non hither to criticize, or to opine on exactly how theatre Fed rules should be. The betoken is that the Fed is conducting this scrap at the highest levels, fully informed past times modern academic inquiry on the subject.
The word surrounding financial stimulus inwards 2008-2009 strikes me every bit having been a proficient bargain less sophisticated in addition to much to a greater extent than "old-Keynesian," involving static "multipliers," right away from a 1970s textbook. But that may last a pathetic illustration every bit it was done inwards a huge hurry, within the Administration, in addition to away from the form of carefully constructed policy procedure that the Fed in addition to other agencies maintain.
Fed speeches, fifty-fifty from chairs Bernanke in addition to Yellen, are peppered alongside citations to academic travel in addition to staff work. More prove of a tight connecter betwixt modern inquiry in addition to peak grade policy discussions.
In fact, i tin quite plausibly complain that the Fed, IMF, in addition to similar institutions are too close to academic research, or maybe that academic inquiry is likewise motivated past times finding reasons for the latest policy idea. In no other expanse that I tin recollect of, where of import policy is made in addition to at that spot is a corresponding trunk of academic research, exercise people seriously suggest to guide policy based on the latest, ordinarily unpublished, in addition to ordinarily novel, research. We hold back a piece for ideas to settle.
As an instance, I've been a scrap critical of the apparent distance betwixt policy in addition to research, in addition to I've also been quite critical of the electrical flow generation of new-Keynesian models. Well, John, brand upward your mind! On the latter view, I should sure enough non advocate that the Fed tomorrow implement policy based on the latest large-scale estimated new-Keynesian model. But on the former, I receive got to acknowledge that sort of thing has been measure academic inquiry for xx years now. Most bloggers intend "the Fed should pay to a greater extent than attending to my research," but I won't -- yes, inquiry has to settle earlier beingness used for policy.
The difficult fact is that economical models are quantitative parables, non explicit in addition to consummate descriptions of reality. The footstep of agreement the model's "intuition," "basic message," in addition to thence forth is devilishly hard. That's why nosotros receive got such deep verbal discussions most economical models, where nosotros imagine physicists exactly examine them in addition to are done. (They don't, but that's some other story.)
An example. In 2012, Mike Woodford gave a subsequently not to the lowest degree from me. Do people believe such promises? Yes, nosotros tin write a model inwards which the Fed announces a novel new rule, in addition to everyone believes it. But does the globe travel that way? More deeply, is the underlying model right? For illustration (of many) is my electrical load that it assumes the Fed threatens to blow upward the economic scheme a large problem, or exactly an easily-fixed technical simplification?
Be it every bit it may, this was first-rate academic research, past times a first-rate academic, in addition to it manifestly profoundly influenced the policy debate.
H5N1 similar story occurs daily on how the Fed should recollect most "secular stagnation," "macroprudential policy," "pricking property toll bubbles," long term labor forcefulness participation, inequality, in addition to thence on in addition to thence on. As a concrete example, Jeremy Stein when on the board gave an fantabulous serial of thoughtful speeches on the relation betwixt monetary policy in addition to financial stability. Here is a proficient one, bristling alongside citations to academic research.
The problem alongside all this is non a lack of contact betwixt Fed in addition to academic research. The problem is, if anything likewise much! The basic "trouble alongside macroeconomics," circa 2014, is most the same every bit the "trouble alongside physics," circa 1790. We know a lot. But at that spot is thence much nosotros don't know.
All of this work, really, is most "frictions" inwards the economy. "sticky prices," "sticky wages," whatever they actually mean, "financial frictions," leverage constraints, collateral constraints, temporarily segmented markets, "liquidity," every bit much inwards the midpoint of the beholder every bit smut, in addition to thence on in addition to thence forth. The "trouble" alongside macroeconomics is that we're actually solely commencement to figure out what all this actually way in addition to how it works.
To the similar electrical load that at that spot is "too much math" inwards economics: no, at that spot is likewise little! We don't receive got the tools to model, understand, in addition to command all these hazy ideas that appear to thing when nosotros aspect at the world.
I recollect at that spot are some unfortunate heirs of the old-Keynesian tradition soundless at travel inwards policy-making, however. It is natural that they are there, but I recollect it volition last proficient when they vanish.
First, since models are quantitative parables, in addition to it takes a long fourth dimension to digest what they actually intend for a given situation, it is natural that the peak grade of policy makers to maintain to digest novel travel inwards an old model. "Oh yes, I see, this model actually way 'aggregate demand' is depression in addition to stimulus volition heighten it. Now I acquire it." That's a perfectly normal reaction.
Second, in addition to deeper, the Keynesian policy tradition left a rigid wishing for activist, discretionary, "what exercise nosotros exercise today?" sorts of answers.
I long agone sat at a hilarious academic advisory coming together at a Federal Reserve, at which the banking corporation president asked, bottom line, whether nosotros thought the Fed should raise, cut, or exit lone the funds rate. Academic after academic gave beautiful speeches most the right policy rule. (Me, an ode to toll grade targets rather than inflation charge per unit of measurement targets.) The pathetic exasperated president said, "that's all real nice, but what should nosotros exercise now?"
This telephone phone for action, for activist discretionary response, is at the heart in addition to someone of Keynesian economics. It's real very difficult to speak most rules in addition to institutions rather than actions. And the heart in addition to someone reply of modern intertemporal economic science is to unask the question. But people expecting a daily discretionary conclusion exactly don't wishing to hear most the rule. In this regard, the policy mindset soundless is decidedly old-Keynesian.
As a counterexample, consider yell for the query "what should monetary policy exercise most unemployment" inwards the 1800s. There was no Fed. "Monetary policy" consisted of the gilt standard, implemented past times the Treasury. The reply would be, "the toll of gilt is $20 per ounce. What's your question?" I'm non (!) proverb that's the right policy, but it is a pure illustration of a dominion rather than activist discretion. A serious word most a rules-based Fed would start past times canceling the regular FOMC meetings in addition to the economical review. That exactly presupposes that the whole procedure is to come upward to a discretionary decision.
Third, economical policy word seems to ignore the tremendous lack of cognition nosotros receive got over basic displace in addition to lawsuit mechanisms, fifty-fifty the signs in addition to causal channels of effects allow lone magnitudes. Policy discussions boundary to exploiting the latest friction earlier the ink is dry.
But past times in addition to large policy decisions don't, in addition to are quite conservative most implementing novel ideas. Expectations, rules, discretion in addition to commitment, are from the belatedly 1970s!
When things are ambiguous, you lot stick alongside what you've got. Keneysian orthodoxy ruled for a long time. Even if it's shown to last wrong, replacement models are thence different, soundless thence untested in addition to unrefined, continuing to exercise basic Keynesian intuition is a natural response to ambiguity.
Fourth, I volition complain a scrap most how much academic inquiry produces answers to back upward desired policy rather than the other way around. Stimulus came on the political landscape, in addition to a hundred papers are written most how stimulus mightiness work. The i thing I volition gently chide some people (not all!) at the Fed for is how oftentimes staff reports come upward up alongside the issue that the chair wants to hear. This is peculiarly truthful when introducing "frictions" to models. Yes, this or that friction mightiness justify a policy. But if you lot actually recollect glutinous reward are the problem, why write articles justifying primal banking corporation intervention, in addition to non i on how reward mightiness last profitably unstuck?
But these youngster complaints aside, every bit I aspect at the layer of policy procedure exactly below the headline political appointees, in addition to exactly to a higher house the lightheaded materials inwards the persuasion pages of the New York Times, actually the interplay of academic ideas in addition to policy is most every bit good for you lot every bit I could brand it. (Obeying the dominion that i has to last evenhanded most all research, non exactly my research!) H5N1 residual, fading, dorsum of the envelope Keynesianism is pretty natural. And the proficient ideas of modern, intertemporal, people-based, budget-constraint-disciplined, economic science are beingness digested in addition to slow implemented.
Next, this whole novel Keynesian vs. old-Keynesian thing.
Update: H5N1 correspondent points out that the actual FOMC statement is to a greater extent than nuanced,
Update 2: I reckon from blogger's trackbacks that Paul Krugman covered this post. I'll maintain to the green don't-respond-to-Krugman policy, alongside i exception. Krugman writes:
Mike Woodford inwards particular has been a friend in addition to a colleague for many years. I receive got learned a lot from him, I receive got benefited enormously from his comments on my work, in addition to I've read his inwards detail. I taught PhD classes from his book.
The accuse that I don't know or haven't read or of late discovered Woordford is laughable. I spent most five years of my inquiry life writing "Determinacy in addition to Identification" which is zilch but a careful dissection of new-Keynesian economic science every bit distilled inwards Mike's book. I may last wrong, but non out of ignorance.
Mike, if you're listening, I can't command the vitriol that the New York Times sees lucifer to print, so all I tin exercise is postal service a correction to my humble weblog -- Krugman is making this upward out of sparse air.
Update 3: Due to an avalanche of intend comments from Krugman's choir, I've turned off comments on this post.
As penance, I'll attempt a weblog postal service that to a greater extent than accurately characterizes the interaction of inquiry in addition to policy, "Keynesian" in addition to modern economics, in addition to thence on, every bit I reckon it.
If nosotros aspect i footstep below the political level, for illustration at the FOMC minutes in addition to what inquiry staff are upward to at institutions similar Fed in addition to IMF, you lot reckon a real sophisticated interaction betwixt the ideas of modern economical inquiry in addition to policy. The FOMC minutes in addition to speeches past times board members (all like shooting fish in a barrel to discovery on the Fed's website) are a swell source. The FOMC seems, to an outsider, like the world's highest-level debating social club on modern macroeconomics.
On many of the dividing lines betwixt traditional Keynesian in addition to modern economics, the policy word is decidedly modern.
Traditional Keynesian economic science is to a higher house all, static. Consumption depends on income, today; investment depends on involvement rates in addition to brute spirits, today, in addition to thence on. This is inwards exercise its swell success. At the time, people didn't receive got the tools to exercise dynamic intertemporal economics.
Now nosotros do. Modern macroeconomics is, to a higher house all, intertemporal. People brand consumption in addition to investment decisions, thinking most today in addition to the future. This intertemporal revolution started alongside the permanent income model, that consumption depends on expected hereafter income, in addition to continues to this day.
(Let me rapidly halt a word that volition spin out of command into quotations from Keynes in addition to what he mightiness receive got "really meant." What matters is what was inwards Keynesian models, used inwards policy for generations, in addition to that's ISLM. Perhaps a deeper reading of Keynes -- or Marx, or Smith, or the Talmud -- mightiness give away some intertemporal poetry. But it actually had lilliputian lawsuit on how models are used or policy was done. So hither "Keynesian" way ISLM-ASAD.)
Now, if you lot read FOMC minutes, Fed speeches, or speak to people at the Fed most policy, you lot volition reckon that this intertemporal, expectation-focused approach resulting from the revolutions of the 1970s permiates the policy-making process. For example, "forward guidance" is the rage. It solely takes i beer for the conversation to rapidly acknowledge that QE probable worked every bit much past times signaling depression involvement rates for a long fourth dimension than it did past times exploiting some sort of permanent price-pressure inwards Treasury markets.
More deeply, the Fed policy word recognizes that "expectations" are non the same things every bit "speeches past times world officials." People receive got heard lots of promises before. Policy faces a deep "time consistency" in addition to "commitment vs. discretion" problem, i time to a greater extent than exercise of the belatedly 1970s revolution inwards macroeconomics. People don't believe promises made now, because they know the Fed may alter its hear later.
This realization led modern macroeconomics to focus on policy rules, rather than policy actions, which nosotros tin chalk upward every bit a 2nd major interruption betwixt traditional Keynesian analysis in addition to modern macroeconomics. Rules tin last written down, legal or constitutional constraints, or merely traditions long observed. The best way to "manage expectations" is non to "manipulate" them alongside speeches, but instead to follow well-established rules -- fifty-fifty when you'd rather not. Friedman's 4% dominion from the 1960s had some of this flavor. Taylor's involvement charge per unit of measurement dominion from the 1990s has it explicitly, in addition to inflation target rules fifty-fifty to a greater extent than strongly.
Over the finally xx years, in addition to especially nether chairman Ben Bernanke, you lot could reckon the importance of transparent, predictable, rule-based thinking accept hold. The early on Fed was deliberately secretive in addition to deliberately obscure. There was a fourth dimension when they wouldn't fifty-fifty say markets what the Federal Funds target was! Since then, explanation of what the Fed is doing, why the Fed is doing it, what the Fed is probable to exercise inwards the future, in addition to finally how the Fed volition react to events inwards the hereafter -- a "state-contingent" dominion -- has drib dead to a greater extent than in addition to to a greater extent than of import inwards Fed discussions.
This mental attitude took a lilliputian footstep dorsum recently; the Fed tried to communicate that involvement rates would rising when unemployment cruel below 6.5%. (Clarification below.) That promptly happened, unexpectedly, forcing the Fed to backtrack in addition to say no, wait, nosotros actually wishing to aspect at broader labor marketplace indicators.
Well, it's difficult to follow rules ex-post. That's the whole betoken of rules! Adopting rules needs major changes inwards what nosotros aspect of policy too. If Janet Yellen had raised rates every bit "promised," in addition to then went to Congress to say "we proclaimed a rule, thence nosotros had to stick to it fifty-fifty though nosotros in addition to you lot both thought the economic scheme way likewise weak to heighten rates," you lot tin imagine the howls.
I'm non hither to criticize, or to opine on exactly how theatre Fed rules should be. The betoken is that the Fed is conducting this scrap at the highest levels, fully informed past times modern academic inquiry on the subject.
The word surrounding financial stimulus inwards 2008-2009 strikes me every bit having been a proficient bargain less sophisticated in addition to much to a greater extent than "old-Keynesian," involving static "multipliers," right away from a 1970s textbook. But that may last a pathetic illustration every bit it was done inwards a huge hurry, within the Administration, in addition to away from the form of carefully constructed policy procedure that the Fed in addition to other agencies maintain.
Fed speeches, fifty-fifty from chairs Bernanke in addition to Yellen, are peppered alongside citations to academic travel in addition to staff work. More prove of a tight connecter betwixt modern inquiry in addition to peak grade policy discussions.
In fact, i tin quite plausibly complain that the Fed, IMF, in addition to similar institutions are too close to academic research, or maybe that academic inquiry is likewise motivated past times finding reasons for the latest policy idea. In no other expanse that I tin recollect of, where of import policy is made in addition to at that spot is a corresponding trunk of academic research, exercise people seriously suggest to guide policy based on the latest, ordinarily unpublished, in addition to ordinarily novel, research. We hold back a piece for ideas to settle.
As an instance, I've been a scrap critical of the apparent distance betwixt policy in addition to research, in addition to I've also been quite critical of the electrical flow generation of new-Keynesian models. Well, John, brand upward your mind! On the latter view, I should sure enough non advocate that the Fed tomorrow implement policy based on the latest large-scale estimated new-Keynesian model. But on the former, I receive got to acknowledge that sort of thing has been measure academic inquiry for xx years now. Most bloggers intend "the Fed should pay to a greater extent than attending to my research," but I won't -- yes, inquiry has to settle earlier beingness used for policy.
The difficult fact is that economical models are quantitative parables, non explicit in addition to consummate descriptions of reality. The footstep of agreement the model's "intuition," "basic message," in addition to thence forth is devilishly hard. That's why nosotros receive got such deep verbal discussions most economical models, where nosotros imagine physicists exactly examine them in addition to are done. (They don't, but that's some other story.)
An example. In 2012, Mike Woodford gave a subsequently not to the lowest degree from me. Do people believe such promises? Yes, nosotros tin write a model inwards which the Fed announces a novel new rule, in addition to everyone believes it. But does the globe travel that way? More deeply, is the underlying model right? For illustration (of many) is my electrical load that it assumes the Fed threatens to blow upward the economic scheme a large problem, or exactly an easily-fixed technical simplification?
Be it every bit it may, this was first-rate academic research, past times a first-rate academic, in addition to it manifestly profoundly influenced the policy debate.
H5N1 similar story occurs daily on how the Fed should recollect most "secular stagnation," "macroprudential policy," "pricking property toll bubbles," long term labor forcefulness participation, inequality, in addition to thence on in addition to thence on. As a concrete example, Jeremy Stein when on the board gave an fantabulous serial of thoughtful speeches on the relation betwixt monetary policy in addition to financial stability. Here is a proficient one, bristling alongside citations to academic research.
The problem alongside all this is non a lack of contact betwixt Fed in addition to academic research. The problem is, if anything likewise much! The basic "trouble alongside macroeconomics," circa 2014, is most the same every bit the "trouble alongside physics," circa 1790. We know a lot. But at that spot is thence much nosotros don't know.
All of this work, really, is most "frictions" inwards the economy. "sticky prices," "sticky wages," whatever they actually mean, "financial frictions," leverage constraints, collateral constraints, temporarily segmented markets, "liquidity," every bit much inwards the midpoint of the beholder every bit smut, in addition to thence on in addition to thence forth. The "trouble" alongside macroeconomics is that we're actually solely commencement to figure out what all this actually way in addition to how it works.
To the similar electrical load that at that spot is "too much math" inwards economics: no, at that spot is likewise little! We don't receive got the tools to model, understand, in addition to command all these hazy ideas that appear to thing when nosotros aspect at the world.
I recollect at that spot are some unfortunate heirs of the old-Keynesian tradition soundless at travel inwards policy-making, however. It is natural that they are there, but I recollect it volition last proficient when they vanish.
First, since models are quantitative parables, in addition to it takes a long fourth dimension to digest what they actually intend for a given situation, it is natural that the peak grade of policy makers to maintain to digest novel travel inwards an old model. "Oh yes, I see, this model actually way 'aggregate demand' is depression in addition to stimulus volition heighten it. Now I acquire it." That's a perfectly normal reaction.
Second, in addition to deeper, the Keynesian policy tradition left a rigid wishing for activist, discretionary, "what exercise nosotros exercise today?" sorts of answers.
I long agone sat at a hilarious academic advisory coming together at a Federal Reserve, at which the banking corporation president asked, bottom line, whether nosotros thought the Fed should raise, cut, or exit lone the funds rate. Academic after academic gave beautiful speeches most the right policy rule. (Me, an ode to toll grade targets rather than inflation charge per unit of measurement targets.) The pathetic exasperated president said, "that's all real nice, but what should nosotros exercise now?"
This telephone phone for action, for activist discretionary response, is at the heart in addition to someone of Keynesian economics. It's real very difficult to speak most rules in addition to institutions rather than actions. And the heart in addition to someone reply of modern intertemporal economic science is to unask the question. But people expecting a daily discretionary conclusion exactly don't wishing to hear most the rule. In this regard, the policy mindset soundless is decidedly old-Keynesian.
As a counterexample, consider yell for the query "what should monetary policy exercise most unemployment" inwards the 1800s. There was no Fed. "Monetary policy" consisted of the gilt standard, implemented past times the Treasury. The reply would be, "the toll of gilt is $20 per ounce. What's your question?" I'm non (!) proverb that's the right policy, but it is a pure illustration of a dominion rather than activist discretion. A serious word most a rules-based Fed would start past times canceling the regular FOMC meetings in addition to the economical review. That exactly presupposes that the whole procedure is to come upward to a discretionary decision.
Third, economical policy word seems to ignore the tremendous lack of cognition nosotros receive got over basic displace in addition to lawsuit mechanisms, fifty-fifty the signs in addition to causal channels of effects allow lone magnitudes. Policy discussions boundary to exploiting the latest friction earlier the ink is dry.
But past times in addition to large policy decisions don't, in addition to are quite conservative most implementing novel ideas. Expectations, rules, discretion in addition to commitment, are from the belatedly 1970s!
When things are ambiguous, you lot stick alongside what you've got. Keneysian orthodoxy ruled for a long time. Even if it's shown to last wrong, replacement models are thence different, soundless thence untested in addition to unrefined, continuing to exercise basic Keynesian intuition is a natural response to ambiguity.
Fourth, I volition complain a scrap most how much academic inquiry produces answers to back upward desired policy rather than the other way around. Stimulus came on the political landscape, in addition to a hundred papers are written most how stimulus mightiness work. The i thing I volition gently chide some people (not all!) at the Fed for is how oftentimes staff reports come upward up alongside the issue that the chair wants to hear. This is peculiarly truthful when introducing "frictions" to models. Yes, this or that friction mightiness justify a policy. But if you lot actually recollect glutinous reward are the problem, why write articles justifying primal banking corporation intervention, in addition to non i on how reward mightiness last profitably unstuck?
But these youngster complaints aside, every bit I aspect at the layer of policy procedure exactly below the headline political appointees, in addition to exactly to a higher house the lightheaded materials inwards the persuasion pages of the New York Times, actually the interplay of academic ideas in addition to policy is most every bit good for you lot every bit I could brand it. (Obeying the dominion that i has to last evenhanded most all research, non exactly my research!) H5N1 residual, fading, dorsum of the envelope Keynesianism is pretty natural. And the proficient ideas of modern, intertemporal, people-based, budget-constraint-disciplined, economic science are beingness digested in addition to slow implemented.
Next, this whole novel Keynesian vs. old-Keynesian thing.
Update: H5N1 correspondent points out that the actual FOMC statement is to a greater extent than nuanced,
[The committee] currently anticipates that this exceptionally depression gain for the federal funds charge per unit of measurement volition last appropriate at to the lowest degree every bit long every bit the unemployment charge per unit of measurement remains to a higher house 6-1/2 percent, inflation betwixt i in addition to 2 years ahead is projected to last no to a greater extent than than a one-half percent betoken to a higher house the Committee’s 2 percent longer-run goal, in addition to longer-term inflation expectations maintain to last good anchored.But the perception of a dominion in addition to backtracking was real.
Update 2: I reckon from blogger's trackbacks that Paul Krugman covered this post. I'll maintain to the green don't-respond-to-Krugman policy, alongside i exception. Krugman writes:
Well, at to the lowest degree Cochrane at nowadays concedes that Woodford isn’t stupid. Progress!I receive got never, ever, anywhere, inwards writing, inwards words, inwards thought, inwards insinuation, or veiled reference, said that Mike Woodford is "stupid.." I receive got never said or written that anyone is "stupid," "mendacious", "mendacious idiot," "evil," "corrupt," "hack," or whatever other ad-hominen assail or insult. Google all you lot want, you lot volition non discovery whatever such quote. Yes, I mercilessly skewer bad ideas, but never people. To me that is the most bedrock ethical regulation of intellectual honesty.
Mike Woodford inwards particular has been a friend in addition to a colleague for many years. I receive got learned a lot from him, I receive got benefited enormously from his comments on my work, in addition to I've read his inwards detail. I taught PhD classes from his book.
The accuse that I don't know or haven't read or of late discovered Woordford is laughable. I spent most five years of my inquiry life writing "Determinacy in addition to Identification" which is zilch but a careful dissection of new-Keynesian economic science every bit distilled inwards Mike's book. I may last wrong, but non out of ignorance.
Mike, if you're listening, I can't command the vitriol that the New York Times sees lucifer to print, so all I tin exercise is postal service a correction to my humble weblog -- Krugman is making this upward out of sparse air.
Update 3: Due to an avalanche of intend comments from Krugman's choir, I've turned off comments on this post.
