Thursday, November 14, 2013

Usual Rude Comment on Wren-Lewis

Prof Wren-Lewis discusses being a New Keynesian and an old Keynesian at the same time. I note that NKs spend a lot of time being purely NK and analysing models which do not at all fit the basic comovements of GDP and consumption and which are clearly not at all useful approximations ( as they know as shown by their policy advice). Also I ask for any evidence that the NK-OK hybrid fits any data better than the OK models. It is a fact that there are many new Keynesian models in the literature which have Ricardian equivalence ( say Smetts-Wouters). I hope no one takes the policy implications of such grossly unrealistic models seriously. It may be rude to call the analysis of such models insincere lip service to applied math dressed up as economics. However I see no other way to describe the phenomenon. Also you and Cochrane know more about this than I do, but I know of no evidence of superiority of the hybrid model over a model of complete myopia and habit formation. It is certainly true that all of the classical (e.g. Noted ny Friedman) evidence for the PIH fits a model of myopia and habit formation just as well. Since NK DSGE models all include habit formation (to fit the otherwise excess smoothness) the question of what of any empirical vlue is added by forward looking expectations is to my limited knowledge open. The fact that no one uses adaptive expectations is an appeal to authority not evidence. It is simply a fact that the variation TIPs breakevens can be explained in part assuming adaptive expectations R squared of 0.5 is the crazy period 2008-9 is excluded. I contrast thre is no hint of any trace of any explanatory power of forward looking expectations for the very boring reason that achieved inflation rates to maturity of the bonds have hppened to be almost constant since the introduction of TIPs (about 2.5%). Your post suggests that the NK glass is half full with useful insights from both NK and OK models. I am honestly not aware of significant evidnce that the NK glass isn't almost exactly empty. Data here

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