Comment of the Day: JEC argues, I think correctly, that Lawrence J. Christiano, Martin S. Eichenbaum, and Mathias Trabandt: On DSGE Models is significantly less serious and more bad than I had argued. I think he is correct:
JEC: Monday Smackdown: Oh Dear!: "To understand the state of academic macroeconomics, it's worth reading the first two sentences of the paper under discussion. They go like this...
...People who don’t like dynamic stochastic general equilibrium (DSGE) models are dilettantes. By this we mean they aren’t serious about policy analysis.
But who are these dilettantes? Keep reading:
In various sections we respond to some recent critiques of DSGE models. We focus on Stiglitz (2017) because his critique is a particularly egregious mischaracterization of the DSGE literature.
Just to be clear: Joe Stiglitz doesn't like DSGE models. Ergo, Joe Stiglitz—whose hobbies have included a stint as chief economist at the World Bank—is a dilettante, unserious about policy analysis. That doesn't sound quite right.
But what does dilettantism look like?
Macroeconomic policy questions involve trade-offs between competing forces in the economy. The problem is how to assess the strength of those forces for the particular policy question at hand.... Dilettantes who only point to the existence of competing forces at work—and informally judge their relative importance via implicit thought experiments—can never give serious policy advice.
After a set of examples, the authors continue:
In all of the above examples, the dilettante would be content to point out the existence of competing forces. But, policymakers at institutions like the International Monetary Fund are forced to assess their relative magnitude.
Whether this constitutes a remotely plausible characterization of the work of the World Bank's research department during Stiglitz's tenure is left as an exercise to NO IT'S NOT IT'S THE DUMBEST THING I'VE EVER HEARD.
Shhh...settle down you. I'm trying to be dry and pithy here.
But the best part is the very next sentence in which our authors give the entire game away:
DSGE models can and should play a central role in this assessment.
Hang on. "Can and should?" What has become of there is no other possible way and anyone who says otherwise is a big ol' stupidhead? Let us read on:
To be clear, when Madame Lagarde is briefed, she is not given the equations of a DSGE model or its impulse response functions. She is given a set of policy recommendations, and a rationale for each of them. She certainly understands that the recommendations are the result of a process in which layers of staff have worked with combinations of DSGE models, simple theoretical models and a-theoretical representations of the data.
Whoa...trippy. It turns out that, maybe, just maybe, there are other ways to quantitatively estimate the balance of forces and the probable range of net results of policy changes. Weird. It's almost like Lawrence Christiano, Martin Eichenbaum, and Mathias Trabandt knowingly chose to open their paper with a rhetorical salvo they knew to be pure defamatory bullsh-t.
I would change can and should play a central role to might, perhaps, play a peripheral role. There is no Calvo Fairy. Requiring that your policy analysis be based on one is asking for big trouble. Taking a calibrated representative-agent consumption Euler equation as the place you get your estimate of the slope of the investment-savings balance relationship between spending and interest rates is asking for big trouble. That is not where the connection between the investment-savings balance and the interest rate comes from. And taking the residual error from a production function and worshipping it, to any degree, as a fundamental driving variable is and always has been obvious pathetic idiocy.
A model that makes those three assumptions and then carefully tweaks itself to neutralize the destructive consequences of those three assumptions might be harmless—but why do all the work of so rendering it harmless rather than doing something useful? A model that makes those three assumptions and then does not carefully tweak itself to neutralize the destructive consequences of those three assumptions should never have been let into the building, and should be thrown out the window...