" off-the-shelf models are all we need to evaluate aggregate demand problems."
".. There are basically two types of demand-side models
both of which are nearly useless"
" Some general equilibrium models are used to find which stabilization policy regime is optimal from a welfare perspective."
" Most of these models assume some sort of wage/price stickiness. And 100% of the models taken seriously in the real world assume wage/price stickiness. "
" The problem is that there are many types of wage and price stickiness, and many ways of modeling the problem. "
" You can get pretty much whatever policy implication you want with the right set of assumptions."
not bad for a puss wit
" And then there’s the Lucas Critique. " ya exactly
now comes gibberish....
" A second type of model tries to show how to best implement a specific type of policy regime, like inflation targeting. Thus the Taylor Rule is one way of implementing a flexible inflation target. Unfortunately, these “implementation models” conflict with the EMH—it’s not clear why the central bank wouldn’t just peg the price of a futures contract linked to the goal variable. This is embarrassing given that they are mostly based on New Keynesian models, which incorporate rational expectations.
" To summarize, despite all the advances in modern macro, there is no model that anyone can point to that “proves” any particular policy target is superior ...."
"there might be a superior target (indeed I suspect a nominal wage target would be superior.) But it can’t be shown with a model."
" All we can do is construct a model that has that superiority built in by design"
then he humps his hobby horse:
" once we have decided on a nominal aggregate target, there is no model that can outperform a policy of having the central bank peg the price of futures contract linked to the policy goal. "
which lets him ride into the clover
"... once you do all that, fiscal policy becomes a fifth wheel"
final advice to big footed things:
." Models are toys to show our students.
When we face serious real world dilemmas
it’s time to put away the toys ..."
then he jumps in the glacial lake :
"...I do have a model, indeed lots of them.
They’re just not mathematical models."
