Monday, August 03, 2015

When did the Freshwater School Adopt the "Adversarial Method"

Paul Romer and Paul Krugman write that Lucas, Prescott et al had great intellectual integrity back in the 70s but then turned to sophistry. I think there is a very eminent eyewitness account of the shift.

I think a very interesting contribution to this discussion is an interview of Sargent by Evans and Honkapohja.

"my recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expectations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests of rational expectations models, I recall both Bob Lucas and Ed Prescott telling me that those tests were rejecting too many good models. The idea of calibration is to ignore some of the probabilistic implications of your model, but to retain others. Somehow, calibration was intended as a balanced to professing that your model, though not correct, is still worthy as a vehicle for quantitative policy analysis."

So they took the wrong turn after about five years. I note two things -- Sargent said this soon after being awarded the Nobel memorial prize.

The other is that the Lucas critique is a critique of exactly what Lucas did after "about five years". assuming that a model is useful as a vehicle for quantitative policy analysis by looking only at the fit of the variables policy makers care about.

1 comment:

Paul Romer said...

I took a look at the surrounding parts of the Sargent interview. These remarks hint at the shift but I can't find anything more specific about the timing. They are also somewhat elliptical. Thanks in any case for pointing these out.