The failure of modern macro
2009-01-16 · Original WordPress address
Thomas Sargent complains that the arguments for the fiscal stimulus "ignore what we have learned in the last 60 years of macroeconomic research." This is his fault. He and the other big names of modern macro have failed to produce a simple model (or a series of simple models) to replace the Keynesian one in undergrad textbooks.
Policy makers, and even economist that don't specialize in macro, were taught to think about the economy like Keynes did 75 years ago. They shouldn't be expected to absorb cutting edge research only taught in grad schools. The problem is that this stuff is no longer cutting edge. The rational expectations revolution is nearly 35 years old.
In macro, there remains a gearhead culture. To understand 30 year old models you need to learn overly complex jargon and graduate level mathematics. There still isn't a standard tool box for solving models... you're expected to program everything from scratch. Serious macro job candidates are expected to know how to prove fixed point theorems and its not enough in your job market paper to have an interesting economic problem (if that's even necessary at all), but you have to extend some already complex model. Those extensions have to be "tractable" but not necessarily "understandable" (its not clear to me the point of the former without the latter). This means wildly unrealistic assumptions that happen to make the math work, even if they contradict each other in spirit, are ok.
I actually don't mind all that stuff. That's why I signed up to do it. Someone, though, needs to take stock of the economics --- rather than neat mathematical theorems or cool econometric techniques --- modern macro has taught us and write it down in an undergrad textbook.