What Noahpinio Learned in Economics Graduate School
Noahpinion:
Noahpinion: What I learned in econ grad school, Part 2: My second-year field class was divided into four half-semester portions. Each had its own theme. Broadly, these were: 1) Heterogeneous-agent models, 2) Sticky-price models, 3) Neo-monetarism, and 4) Labor search.... Krusell-Smith models... Sticky-price models... sticky-information models... structural vector auto regressions.... We studied this very interesting paper by Basu, Fernald and Kimball.... We learned some neo-monetarist models.... The neo-monetarist policy response to recessions, I learned, is quantitative easing. Or, as my advisor Miles Kimball put it: "Print money and buy stuff!" (He actually repeated this line four times in a row. When I asked him what he thought of Bernanke's response to the recession, he grinned hugely and said "He printed money and bought stuff!") I also learned that some neo-monetarist models have a role for fiscal policy, but only for a short time after a particularly severe drop in investment. We studied labor search models....
The field course addressed some, but not all, of the complaints I had... more focus on calculating observable quantities, and on making predictions about phenomena other than the ones that inspired a model's creation.... But... [T]he measure of a good theory is whether it seems to point us in the direction of models that might work someday....
There were two other big conclusions I drew....
The first was that the DSGE framework is a straitjacket that is strangling the field. It's very costly in terms of time and computing resources.... This means that what ends up getting published are the very simplest models... biases the field toward models in which markets are close to efficient.... Worse, all of the mathematical formalism and kludgy numerical solutions of DSGE give you basically zero forecasting ability....
Finally, my field course taught me what a bad deal the whole neoclassical paradigm was. When people like Jordi Gali found that RBC models didn't square with the evidence, it did not give any discernible pause to the multitudes of researchers.... The aforementioned paper by Basu, Fernald and Kimball... it jumps through all the hoops set up by Lucas and Prescott - but I don't exactly expect it to derail the neoclassical program any more than did Gali.
It was only after taking the macro field course that I began to suspect that there might be a political motive behind the neoclassical research program (I catch on quick, eh?). "Why does anyone still use RBC?" I asked one of the profs. "Well," he said, stroking his chin, "it's very politically appealing to a lot of people. There's no role for government." That made me mad! What about Science? What about the creation of technologies that give humankind mastery over our universe?.... [T]here are plenty of smart, serious macroeconomists out there trying to find something that works. But they are swimming against not one, but three onrushing tides - the limited nature of the data, the difficulty of replicating a macroeconomy, and the political pressure for economists to come up with models that tell the government to sit on its hands...
