Kocherlakota on the State of Modern Macroeconomics

Macro Theorist turned Fed president Kocherlakota writes on this topic here.

8 replies on “Kocherlakota on the State of Modern Macroeconomics”

Pure BS!

Economics is no science.
It is the study of people and development. This apologist is merely pleading for respectability. If he knew his history, he knew what was happening all along.

Not a surprize.

Mr Kocherlakota’s article is a fair and reasonable description of the debate conducted by the 20 or so macro theorists that still think economics has something relevant to say. But it does not engage, at all, with the critics.

Buiter’s critique, for example, rests on the lunacy of the ‘complete markets’ assumption underlying GE; Krugman repeatedly points out that DSGE is a triumph of technique and a failure of relevance; Goodhardt: DSGE excludes everything that interest me. Akerlof & Schiller: the world just does not work the way posited by DSGE; they don’t capture, at all, how human behaviour affects aggreate outcomes.
Kocherlakota and the rest of the 20 seem to willfully refuse to engage at all with any or all of these critiques. With the usual pleading of ‘we are not there yet but stick with the program’.
It’s as if having built the model aeroplane that simply refuses to fly in anything other than zero gravity, the modellers look for a new wing shape. If it doesn’t fly, it doesn’t fly.


I’m with you on the problems DSGE models have. Even Chris Sims is well aware of, and responsive to, DSGE criticisms, see here: http://bit.ly/9k4O0M, but as he points out, there aren’t coherent alternatives just yet. Do you know of a set of models, or even an approach, that comes close to having the modeling abilities of a set of DSGEs? I’m speaking here as someone who has spent quite a while looking for one, and I’d be delighted for any directions in this regard.

One could construe the whole ‘new economic ideas’ movement as an anti-DSGE rant, but that hasn’t gotten us anywhere either, unfortunately.

@ PD: “Economics is no science.” – but it is … … scientology!

The aggregate behaviour of human beings can(not) be modelled??? Who knows? Chaos Theory? Theory and reality are separate – but only by a semi-permeable membrane! Guess which way the osmosis flow.

The macro aggregate model appears to exclude a power source and an energy sink. Unless of course GE is being conceived as a perpetual-motion machine. This lack of a power/energy, input/output elements is sufficient to condemn the model as being non-science.

There is also the nasty matter of the parasitic FIRE economy. Where is that to be embedded in the GE model?

B Peter

I think you are right: the DSGE crowd have coherence and logic on their side, particularly when compared to any of the alternatives. But that does not make them right or relevant, necessarily. Perhaps Economics is a discipline like Physics was at around the time of Copernicus. Progress can be made, on that view, but only at a relatively glacial pace. But sometimes something comes along that causes us to throw away the old models and think up new ones. It might be a new theory or the simple observation that the sun does not orbit the earth. I think recent events amount to that kind of discovery. Or maybe it’s just beyond us to figure it out: physics has yet to have its complete and verified theory of everything.
I think Hayek hinted at something important in his 1974 Nobel lecture: The Pretence of Knowledge.

Don’t know what to make about his point about new aged macro models continuing with just ‘preference’ and ‘technology’ as the main criteria for any assumptions, continuing to ignore other ‘new aged’ Phenomena like credit crunches or asset market bubbles in the process, I still don’t think it would have made a difference in softening the blow for this crisis (even if they could be input into new models), that’s more of a regulation argument.

I think the issues this essay delves into behavioural economics and does give a large basis for a microeconomic foundation to any macro modelling.

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