tag:blogger.com,1999:blog-582368152716771238.post6447511457755356619..comments2024-03-28T05:14:02.071-05:00Comments on The Grumpy Economist: New vs. Old Keynesian StimulusJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger85125tag:blogger.com,1999:blog-582368152716771238.post-54167034569611362972018-09-14T13:07:58.601-05:002018-09-14T13:07:58.601-05:00Perhaps they are the same "effective theory?&...Perhaps they are the same "effective theory?" http://informationtransfereconomics.blogspot.com/2018/09/what-do-equations-mean.html#comment-formBy The Wayhttps://www.blogger.com/profile/11544413001329820101noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54797209321343609132014-12-12T16:04:00.729-06:002014-12-12T16:04:00.729-06:00"Except new-Keynesian economics does no such ..."Except new-Keynesian economics does no such thing, as I think this example makes clear. If you want to use new-Keynesian models to defend stimulus, do it forthrightly: "The government should spend money, even if on totally wasted projects, because that will cause inflation, inflation will lower real interest rates,"<br /><br />The "even on totally wasted projects" is disengenous. It assumes that most of the money that is spent on government projects are wasted. Do you have studies that prove this assertion or is this just your opinion- you of course know the old Senator Patrick Moynihan saw "you are entitled to your own opinion but not your own facts? Is the money on the TVA, the Hoover Dam, the Panama Canal, our airports and highways "wasted money"?<br /><br />If at any time we should "waste" our money on our crumbling infrastructure it is now. The infrastructure of China and Europe is making our country look shabby.Sharon Knettellhttp://www.sharonknettell.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86950929072764946882013-11-21T16:25:35.101-06:002013-11-21T16:25:35.101-06:00Actually the New-Keynesian model has been predicti...Actually the New-Keynesian model has been predicting deflation and strong output growth for 5 years now. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82423698015066730412013-11-21T08:27:36.466-06:002013-11-21T08:27:36.466-06:00I find it funny to bash Keynesian models, the one ...I find it funny to bash Keynesian models, the one that actually have worked relatively well in this slump. Most of the other models has been predicting inflation for years, and for Japan for a decade or more.<br /><br />All models are wrong, some just are more useful.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-792200925121427062013-11-19T20:33:30.595-06:002013-11-19T20:33:30.595-06:00The dirty little secret is that both sides are gui...The dirty little secret is that both sides are guilty of doing this. When the economy goes South, people want the government to DO something, and the only thing anyone can think to do is a Keynesian responseAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82406271631932165802013-11-15T16:14:43.132-06:002013-11-15T16:14:43.132-06:00The high priest of the Catholic church did not tea...The high priest of the Catholic church did not teach about Copernicus and his mad theories and 'instantly rejected' its publication, even when the ideas had gained currency around Europe.<br /><br />I expect this submission will also be 'instantly rejected'. I might try for an alternate journal.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32143902578965584262013-11-15T10:57:06.422-06:002013-11-15T10:57:06.422-06:00"equals the sum of all future real interest r..."equals the sum of all future real interest rates i less inflation π i.e. all future real interest rates" please replace by "equals the sum of all future nominal interest rates i less inflation π i.e. all future real interest rates"Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-674578121420684072013-11-15T02:00:06.842-06:002013-11-15T02:00:06.842-06:00You set up a straw man by confusing "Bastard ...You set up a straw man by confusing "Bastard Keynesianism", a weed infesting the US, and the real thing, a British hot house flower cultivated principally in Cambridge by English and Italian gardners, with occasional help from a Polish theorist. The absence of such perspectives from the journals - which you take as significant - tells one nothing about the quality of their perspective; it merely tells one who is making the rules for the inclusion of articles; it also underscores the reality that all the real Keynesians are dead. One might suggest that Joan Robinson hit the nail on the head when she said ‘‘The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists’. Perhaps you have offered something that overturns Keynes/Kalecki/Robinson & Sraffa; I must have missed it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13214761671266167452013-11-14T21:02:35.930-06:002013-11-14T21:02:35.930-06:00There are all sorts of hybrid models out there, an...There are all sorts of hybrid models out there, and the new-Keynesian DSGE literature has all sorts of bells and whistles. With bells and whistles (like some rule of thumb consumers) they quickly become black boxes where the basic mechanisms are obscured. My point here was not to look at the most general model, but to strip each one down to its core elements so we could see the basic forces at work. <br /><br />When you add rule of thumb consumers and other bells and whistles to a new-Keynesian model, you do NOT get back to simple old IS LM. You get a model with the core I described above and a lot of additional complex dynamics. As one example, the vast majority of "stimulus" evaluations end up being Ricardian -- stimulus is the same if financed by taxes or by borrowing. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41666993740686496622013-11-14T19:08:23.160-06:002013-11-14T19:08:23.160-06:00Dr. Cochrane,
This is an interesting post. But I...Dr. Cochrane,<br /><br />This is an interesting post. But I can't help but wonder if you've considered the idea that you can, in fact, have a model that is both old and new Keynesian at the same time. Where is the contradiction in assuming an economy with both kinds of consumers depicted in the Old and New Keynesian models? For example, if I'm a credit-constrained consumer, I will probably spend all my additional income, making me fit the old Keynesian model; if I'm an unconstrained consumer, then I'm more likely to fit the intertemporal maximizing world of the New Keynesian model. You'll probably lament about the "microfoundations" of such a model as being difficult, but I really don't see why we can't have both types of consumers in one model. More importantly, doesn't it make sense to give policy advice knowing that both types of consumers exist? It seems to me that's what contemporary Keynesians like Krugman, DeLong, and Woodford are doing--trying to make their models more real-world. I don't see the contradiction in doing that.Timnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29065187605747376302013-11-14T16:39:32.199-06:002013-11-14T16:39:32.199-06:00I think you are selling your excellent JPE 2011 pa...I think you are selling your excellent JPE 2011 paper short here. It is not a paper about "why New Keynesianism is wrong". It is about price determination, and lack thereof, in models with Taylor-type interest rate rules. All formalism on how explosive equilibria cannot be ruled out by reasonable arguments are confined to flex-price models (where prices and inflation are irrelevant, and the latter only appears by insistence on focusing on a Taylor-type rule). When it comes to the New-Keynesian models, you write on p. 593:<br /><br />"One might complain that I have not shown the full, nonlinear model in this case, as I did for the frictionless model. This is a valid complaint, especially since output may also explode in the linearized nonlocal equilibria. I do not pursue this question here since I find no claim in any new-Keynesian writing that this route can rule out the nonlocal equilibria."<br /><br />Indeed, I might complain, but hope to see the analysis done. I do not think one falsifies an entire theory because one cannot find papers that have formally validated one's own conjecture of what could otherwise "save" it.<br /><br />Best, HenrikHenrik Jensenhttp://hjeconomics.dknoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32894331254235765802013-11-14T15:33:56.793-06:002013-11-14T15:33:56.793-06:00Professor Cochrane,
That was an amusing post.
H...Professor Cochrane,<br /><br />That was an amusing post. <br /><br />However, you are wrong. First, new Keynesians acknowledge that many consumers are credit constrained so any model of the reality should have Old Keynesian effects. Second, the Euler equation does NOT determine consumption by itself, but in combination with the inter temporal budget constraint. Therefore, income (and unemployment, transfer policies, asset holdings etc) have an effect on consumption. There are many reasons why Old Keynesian effects should exist in a New Keynesian world.Irineu de Carvalho Filhohttps://www.blogger.com/profile/14102218468110108053noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41658259261772958222013-11-14T14:23:45.528-06:002013-11-14T14:23:45.528-06:00Prof Cochrane,
Although you have stated that you ...Prof Cochrane,<br /><br />Although you have stated that you wanted this to be about the basic models of old vs new Keynesianism. The only "Keynesians" most of your readership seem to be familiar with are krugman and delong. That being said Krugman is wrong when he accuses you of not being familiar with the Woodford/eggertson literature...clearly he doesn't read your papers...and I frankly don't believe he understands the new-keynesian stuff ...<br /><br />what i mean to say is that krugman thinks his model is old keynesian and doesn't seem to buy into the interest rate mismatch story all that much ... why he believes his model has anything to do with the ISLM, i am still failing to grasp... but if you are actually talking about Krugman whenever you say keynseians it kind of seems like you are setting up a straw manLALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13513845102809068852013-11-14T14:04:31.274-06:002013-11-14T14:04:31.274-06:00Complicated models similar to physicist trying to ...Complicated models similar to physicist trying to explain light energy. All over the place trying to make the old mechanics work. Then came nice and simple E=MC2. Copernicus similar, and ofcourse Keynes the same in Econ. Lower zero bound and liquidity trap means there is no shifting outward of the PPF curve. We rob Peter to pay Paul. Keynes efforts to shift out curve so more benefit. FDR showed reality that some toes get stepped on with TVA. And yes inflation will occur as idle labor enters market and will harm savings. Ancient capital will be replaced perhaps prematurely with innovation supported by WE THE PEOPLE. But being a sleep at the wheel is no excuse for not retrofiring capital. Savings hurt by inflation is nice problem if you have savings. And besides our economy is quick to create new production when inflation signals demand. The worst inflation I know of in this country was gas in the 70's and we survived. Find the simple solution in Fiscal projects and quit wasting time and confusing the debate over these irrelevant models.Unknownhttps://www.blogger.com/profile/03975385311928719901noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76266138081933130692013-11-14T11:56:07.263-06:002013-11-14T11:56:07.263-06:00by your and Mr. Cochrane's analysis, QE doesn&...by your and Mr. Cochrane's analysis, QE doesn't work - so why do both bond and stock markets clearly empirically respond to QE announcements ?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-21023645484648524652013-11-14T11:29:08.352-06:002013-11-14T11:29:08.352-06:00John, what do you mean "56 per cent spent by ...John, what do you mean "56 per cent spent by government". Are you referring to expenditure on the primary government accounts, and/or expenditure by state institutions and state-affiliated institutions? In some economies the distinction between the private and state sector is a blurred, often meaningless one. In some economies a large defence sector is where innovation takes place and cross subsidises the private sector through technology transfer. In some countries the university sector is completely state owned and is basically a training ground for the private sector workforce. There are countries with large state sectors that perform well (Scandinavian and Asian ones) and others that do not (UK, South America). Also there is no connection between state ownership of industry and performance. The Japanese bullet train was an incredible service before and after it was privatised. British trains were disastrous before and after they were privatised. I also wonder whether a lot of these multiplier effects and transmission mechanisms and whether consumption depends on current or permanent income is context specific and an entirely empirical issue. For example the OK or NK explanation and policy response ("model") may be right for the UK in the 1930s, but not for Japan in the 2010s. Are we basically restricting our analysis to the US post 2008? Arguably what some would call a liquidity trap situation?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58241932968332950872013-11-14T09:44:46.725-06:002013-11-14T09:44:46.725-06:00And Woodford is always admirably honest about desc...And Woodford is always admirably honest about describing how his models work. Not many people understand him, or prefer to cite him incorrectly. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41219358695019469532013-11-14T09:42:50.656-06:002013-11-14T09:42:50.656-06:00In depth analysis of why New Keynesianism is wrong...In depth analysis of why New Keynesianism is wrong here<br />http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_taylor_rule_JPE_660817.pdf<br />and here<br />http://faculty.chicagobooth.edu/john.cochrane/research/papers/zero_bound_2.pdfJohn H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-8036608876285963502013-11-14T08:31:59.392-06:002013-11-14T08:31:59.392-06:00Guys will you actrually read what Mr. Cochrane wro...Guys will you actrually read what Mr. Cochrane wrote in his article? He is not exactly arguing against any particular results of New or Old Keynesian models. He just says that they are different. One example that Nick Rowe uses.<br /><br />In new Keynesian Model all that matters is change in Growth Rate of G - not the level. So what can you do to solve the situation? You can do ether this:<br /><br />1) Increase G now while holding future G constant<br /><br />or <br /><br />2) Keep G as it is today and LOWEr future G<br /><br />This is what is implied by New Keynesian model. But please provide me any link where Brad DeLong or Krugman propose anything close to 2). They don't. Why? Because only first thing works for OLD Keynesian model. <br /><br />But this is not right. Then you are as Old Keynesian as it gets. You cannot be selectively blind and completely ignore results of YOUR OWN MODEL just because some completely different model of how economy works is also aligned with one result. <br /><br />And Mr. Cochrane is right - no serious peer rewieved Journal publishes Old Keynesian models right now - and for a reason!. Then why use their intuition? It does not make sense. To say the least it is not intellectually honest. Anonymoushttps://www.blogger.com/profile/14853090724221729923noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1092985011285668012013-11-14T08:19:32.033-06:002013-11-14T08:19:32.033-06:00John: As for Woodford's paper please go and re...John: As for Woodford's paper please go and read starting page 3 containing sentences like <br /><br />"Suppose that the central bank maintains a strict zero inflation target whenever this is possible, and a nominal interest rate of zero whenever defation is unavoidable"<br /><br />What folows is a very technical desription how to use Govenrment Expenditure to prevent deflation that monetary policy is supposedly unable to preven. So long story short - it is your classic New Keynesian model where stimulus works by increasing inflation! If you would present this paper to any Keynesian economist in 1960ies he would stare at it unable to follow. It is completely different story compared to what he was thought how government stimulus works. <br /><br />PS: By the way am I the only one that finds it hardly believable that any central bank that has enough ink and paper on stock will find itself in a situation where "defation is unavoidable". That is complete BS. <br /><br />tl;dr<br /><br />Nope, no problem with Woodfor Paper. It is New Keynesian model through-and-through as described by Mr. CochraneAnonymoushttps://www.blogger.com/profile/14853090724221729923noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72438895486401677082013-11-14T05:21:24.707-06:002013-11-14T05:21:24.707-06:00The point Mr. Cochrane makes here is completely di...The point Mr. Cochrane makes here is completely different. It is something akin to what Nick Rowe says. It basically goes like this:<br /><br />New Keynesian and Old Keynesyan models are COMPLETELY different. They tell absolutelly DIFFERENT story. <br /><br />Now we have public intelectuals that use New Keynesian models but with old Keynesian "intuition". But that intuition is not supported by the model!!!<br /><br />It is like modern physicist calculating what is going on inside the black hole will use Quantum Field theory but he will also assume some results of newtonian physics just to make his model "work" and get rid of some unpleaseant singularities and infinities that would otherwise be implied by his own model. <br /><br />This is not how Science is made! Either New Keynesian model is "righ" and they will explain why some "counterintuitive" (relative to Old Keynesian intuition) explanation that arises from the model is not valid - like for instance promising to decline Government Expenditure in the. future.Anonymoushttps://www.blogger.com/profile/14853090724221729923noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-21954528184626893092013-11-14T05:15:30.387-06:002013-11-14T05:15:30.387-06:00He certainly was here:
http://johnhcochrane.blogsp...He certainly was here:<br />http://johnhcochrane.blogspot.dk/2013/02/three-views-of-consumption-and-slow.html<br />where the PIH gets some more kudos - simply because consumption is solved out as a function of exogenous variables. In any case, my point is just that one cannot say much of any theory with just one equation with four endogenous variables. Partial versus general equilibrium is quite important, as I am sure John would agree to.Henrik Jensenhttp://hjeconomics.dknoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3395780167787068022013-11-13T21:22:13.776-06:002013-11-13T21:22:13.776-06:00To John Cochrane... you said, "If you want to...To John Cochrane... you said, "If you want to use new-Keynesian models to defend stimulus, do it forthrightly..." I'm baffled that you do not recognize that the Keynesian "multiplier" effect is just another way of describing the govt-spending-causes-higher-inflation effect. One is a FLOW model, the other is a STOCK model. The stories as you've penned them are not *always* how they play out - the outcome of increased govt spending depends on the market the spending fall upon. These dynamics are what those Nobel prizes were awarded for, not for disproving Keynes.<br /><br />Finally, Keynes was utterly forthright: even if the Treasury buried money, it would be more beneficial in depression conditions than doing nothing. Krugman and Delong have never disowned this example. Krugman has repeatedly explained that the ramp-up to WWII is the (wasteful) govt spending that finally brought the US out of the Depression, and he even created a new version of it: if govt spending were to increase to fend off a (fake) alien invasion, that would be better than doing nothing, waiting for the economy to heal itself, under these conditions.<br /><br />The big thing you're getting wrong is thinking that New Keynesians are trying to secretly disown the "multiplier."<br /><br />Note: When I say above that one is a Stock and one is a Flow analysis, resist the urge to simplistically dismiss this because it doesn't jive with whatever equations you wish to relate it to. You can understand this without the math - and, in fact, that math tends to add a layer of difficulty, because...: If you want to understand the micro-foundations of empirical macroeconomic reality, you have to embrace complexity: the system that arises from many agents acting with imperfect competition, information asymmetries, and human (evolutionary) psychology. If you start with the assertion of rational expectations and inter-temporal maximization, you've already missed the boat to understanding.<br /><br />Honestly, I'm not sure the paper has been written yet that provides the accurate Stock vs Flow equations, but Krugman hinted at some of this in his 11/7 IMF presentation, and his analysis (re international trade and currency flows, exchange and interest rates, and both public and private debt as an inter-temporal buffer) goes a long way toward providing a micro-foundations model that applies to individual behavior, too. But to see this, you have to think carefully about the analogues of these variables in individual psychology.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47969962672108114052013-11-13T21:13:56.281-06:002013-11-13T21:13:56.281-06:00Just an addendum: The 7% rate is only make up for ...Just an addendum: The 7% rate is only make up for the financial crisis, 2% is what the CB aims for the next year, and the normal price level increase year to yearEdwardnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-55172731221510843102013-11-13T21:10:39.906-06:002013-11-13T21:10:39.906-06:00Dr. Cochrane,
Its easy to bash "Old Keynesian...Dr. Cochrane,<br />Its easy to bash "Old Keynesianism." I don't believe in it. But if Im not mistaken, your original post attacking fiscal stimulus as fiscal fallacy did NOT address New Keynesianism. At all. I commend you now for doing so!<br /><br />So where's the in-depth analysis of why New Keynesianism is wrong? :-) Because it seems to me that THAT theory, not the idea of the multiplier, but the idea of increasing inflation expectations to lower real interest rates, makes a lot more sense. Advocates of stimulus have this story to fall back on and they do.<br /><br /><br />Just a side note on the 1970's. Yes, the 1970 DID show that there was no LONG RUN trade off between inflation and unemployment, but even Milton Friedman was careful to admit that indeed there was a SHORT term tradeoff. (A tradeoff that we ought to exploit vigorously now) Just look at the evidence when Paul Volcker relented and lowered the punishingly high interest rates he used to create the 1982 recession. If it were true that there is no tradeoff AT ALL between inflation. and unemployment, all the lowering of interest rates would have done is increase inflation but it didn't! It lowered the unemployment rate. The short term tradeoff was reformed.<br /><br />Level targeting is a rules based policy that uses this insight. Imagine an economy running smoothly at an inflation rate of 2 percent. Then, a financial crisis hits, Inflation falls into 5% deflation! The country's central bank acts quickly to end the deflation, but not to the previous level of 2%, Instead they rest easy at 1.0%. (thats why your argument that the Philips Curve is screaming supply was so troubling to me). But even IF the CB was more aggressive and pushed inflation to 2%, The NAIRU there would be profoundly misleading, because it would ignore the huge drop in the financial crisis. The proper inflation rate is 7%! (At least for that year) 2% inflation which is the normal trend, plus 5% "make-up" for the crisis. Only then can we determine what the natural unemployment rate is and determine demand from supply. The NAIRU is wrong. it should be the NAPLU (Non-accelerating price level of unemployment) Or, as I would prefer, the NANILU! (Non-accelerating Nominal Income Level of Unemployment)Edwardnoreply@blogger.com