May I Say That I Really Have Absolutely No Idea What Robert Lucas Is Talking About...
…when he claims that the post-World War II evidence "overwhelmingly supports the dominant importance of real shocks" to tastes and technologies in explaining fluctuations in unemployment at frequencies higher than 1/10yr?
What is that evidence?
Where is it? What shocks to tastes drove the unemployment rate up from 5.3% in 1989 to 7.6% in 1992? What shocks to technologies did so?
Noah Smith:
I find Bob Lucas more intriguing than any other economist of the last few decades: Bob Lucas on macro: I'm always interested to read what he has to say, for example in this recent interview (hat tip to Steve Williamson). Some excerpts….
Here's Lucas on DSGE modeling:
Virtually all macroeconomic models today are dynamic, stochastic and general equilibrium…. If we narrow the definition of DSGE by using "general equilibrium" to refer to competitive or Nash equilibria where the strategy sets of each agent are made explicit in an internally consistent way then we have Kydland-Prescott and other RBC descendants and not much else….
Is this true? I don't think it is true. For example, take a Calvo model. In a Calvo, model, agents' ability to set prices is restricted by a mysterious, exogenous "Calvo Fairy"…. In a Prescott-type RBC model, agents' decisions are constrained by exogenous "technology"; you might think that this is more plausible an assumption than a "Calvo Fairy", but in terms of its effect on the internal consistency of the strategy sets of the agents in the model, it seems no different. Or maybe I'm reading Lucas wrong here?
Lucas on the causes of business cycles:
I was [initially] convinced by Friedman and Schwartz that the 1929-33 down turn was induced by monetary factors…. I concluded that a good starting point for theory would be the working hypothesis that all depressions are mainly monetary in origin. Ed Prescott was skeptical about this strategy from the beginning…. I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008…..
