- 'Do not Underestimate the Power of Microfoundations'
- 'Germany's Trade Surplus is a Problem'
- Links for 04-04-15
- Fed Watch: Air Pocket
Posted: 04 Apr 2015 04:36 AM PDT
Simon Wren-Lewis takes a shot at answering Brad DeLong's question about microfoundations:
Do not underestimate the power of microfoundations: Brad DeLong asks why the New Keynesian (NK) model, which was originally put forth as simply a means of demonstrating how sticky prices within an RBC framework could produce Keynesian effects, has managed to become the workhorse of modern macro, despite its many empirical deficiencies. ... Brad says his question is closely related to the "question of why models that are microfounded in ways we know to be wrong are preferable in the discourse to models that try to get the aggregate emergent properties right."...
Why are microfounded models so dominant? From my perspective this is a methodological question, about the relative importance of 'internal' (theoretical) versus 'external' (empirical) consistency. ...
I would argue that the New Classical (counter) revolution was essentially a methodological revolution. However..., it will be a struggle to get macroeconomists below a certain age to admit this is a methodological issue. Instead they view microfoundations as just putting right inadequacies with what went before.
So, for example, you will be told that internal consistency is clearly an essential feature of any model, even if it is achieved by abandoning external consistency. ... In essence, many macroeconomists today are blind to the fact that adopting microfoundations is a methodological choice, rather than simply a means of correcting the errors of the past.
I think this has two implications for those who want to question the microfoundations hegemony. The first is that the discussion needs to be about methodology, rather than individual models. Deficiencies with particular microfounded models, like the NK model, are generally well understood, and from a microfoundations point of view simply provide an agenda for more research. Second, lack of familiarity with methodology means that this discussion cannot presume knowledge that is not there. ... That makes discussion difficult, but I'm not sure it makes it impossible.
Posted: 04 Apr 2015 03:50 AM PDT
Posted: 04 Apr 2015 03:33 AM PDT
Posted: 03 Apr 2015 10:52 AM PDT
Air Pocket, by Tim Duy: The employment data hit an air pocket in March, in line with a variety of softer economic news in the first quarter. That said, it likely will have little near term impact on Fed policy; I anticipate they will tend to dismiss the number as expected volatility in the overall upward path of job growth.
Job growth was paltry 126k in March and, in what might be a greater indication that US labor markets are hitting an inflection point, the January and February numbers were revised downward. The three-month moving average dipped sharply, while the 12-month moving average is leveling out:
A clear slowdown in the good producing sector is contributing to the weaker numbers as the impact of lower oil prices works through mining. That factor, the stronger dollar, and the West coast port slowdown are also likely taking a toll on manufacturing. Flat construction numbers also contributed.
The unemployment rate was unchanged at 5.5% and wage growth remains tepid compared to last year. Payrolls in the context of indicators previously cited by Federal Reserve Chair Janet Yellen:
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