Morning Must-Read: Noah Smith: Another Contribution to the "Microfoundations" Debate...
Noah Smith: I love microfoundations. Just not yours:
Check out the debate between Tony Yates and Simon Wren-Lewis.... It was kind of cute that Yates singled out Calvo pricing as an unrealistic, kludgey, hold-your-nose sort of microfoundation.... Lagos-Wright (2005)... is every bit as unrealistic as Calvo pricing, but you don't hear Freshwater guys like Yates kvetching about that.... In the comments to Wren-Lewis' post, I wrote "YES YES A THOUSAND TIMES YES". In a follow-up post, Yates caricatures my comment as "NO NO GET RID OF ALL THE MOTHER&&&&&&G MICROFOUNDATIONS WHILE YOU ARE AT IT." But let us ignore that particular flerp-o'-derp for now, and focus on why Wren-Lewis is so very very right....
Yates says I just want to get rid of all the microfoundations. But that is precisely, exactly, 180 degrees wrong! I think microfoundations are a great idea! I think they're the dog's bollocks! I think that macro time-series data is so uninformative that microfoundations are our only hope for really figuring out the macroeconomy. I think Robert Lucas was 100% on the right track when he called for us to use microfounded models. But that's precisely why I want us to get the microfoundations right. Many of microfoundations we use now (not all, but many) are just wrong...
