Smith puts up something of a defense of Macro to the charges against it back after the 2008 crisis. I don't know that I wholly buy his argument that you can't hold it against Macro that it failed to predict the crisis. Noah's basically saying that no one can predict such things-yes, maybe some people were talking about a crisis before it happened but they are basically just Cassandras who have to be right once a day as even a busted clock is:
" First of all, precious few people predicted the crisis, and a number of those that did have tended to be the type of people who predict crises every week. In 2011, a lot of the people who supposedly got 2008 were predicting another crisis - a wave of government defaults, followed by hyperinflation. Didn't happen. Meanwhile, people remembered that there are things out there that are just really hard to predict, like earthquakes."
"And also, it's not like macroeconomics betrayed the people's confidence in this regard. I don't think many people inside or outside of the profession thought in 2007 that macro was able to predict recessions, financial crises, etc."
"Basically, the speed with which macro has put finance at the center of its theories of the business cycle has been nothing less than stunning."
" First of all, precious few people predicted the crisis, and a number of those that did have tended to be the type of people who predict crises every week. In 2011, a lot of the people who supposedly got 2008 were predicting another crisis - a wave of government defaults, followed by hyperinflation. Didn't happen. Meanwhile, people remembered that there are things out there that are just really hard to predict, like earthquakes."
"And also, it's not like macroeconomics betrayed the people's confidence in this regard. I don't think many people inside or outside of the profession thought in 2007 that macro was able to predict recessions, financial crises, etc."
http://noahpinionblog.blogspot.com/2014/03/how-macro-answered-its-critics.html?showComment=1394270059282#c409177680850584508
It's true that there are those who are always predicting a crisis. I haven't found people over the last few years who predict another crisis very convincing. However, if someone say predicted a crisis in 2006 and then again in 2012 the fact that they were wrong in 2012 doesn't mean they were wrong in 2006 as they obviously weren't. I remember the housing bubble and at the time it seemed pretty likely that there was trouble a foot. I remember a number of people who predicted it and again, I found it likely too and of course I had no model to come to that conclusion it was just obvious if you looked at how the housing market was behaving.
The trouble with Macro is that it believed that you couldn't have a national housing bubble that this could maybe happen in certain regional markets but not nationally. Part of it is that the belief in efficient markets makes folks like Noah downplay the possibility of predictions anyway.
I also question Noah's justification for Rational Expectations-there is just no other viable alternative.
"As for rational expectations, there have not been many attempts to replace rational agents with irrational ones (though some top theorists have played around with the idea). An alternative concept of rationality, Bayesian learning, has been getting more attention from DSGE theorists. But so far, macroeconomists are still very timid about abandoning this pillar of the Lucas/Prescott Revolution. Why? One big reason is that there's no clear alternative. There are lots and lots of ways people could be irrational, and it takes a big leap of faith to pick one of those ways and run with it. That's probably why critics of this aspect of macro are frustrated, and will continue to be frustrated - it's easy to see that rational expectations isn't a law of the Universe, but it's devilishly hard to agree on which alternative should replace it."
The obvous question is what did macroeconomists do before Lucas? The answer, of course, is adaptive expectations. I know that some like Nick Rowe think that these models assumed people are stupid. I'm not sure that's really the case but in any case these were certainly functional. Whether you would want to go back to AE or not, the point of critics is not that we need a model called Irrational Expectations-the point is not that people are irrational or even not rational but just that the concept of rationality in RE is absurdly overdone. People are not omni rational by the definitin of RE-totally forward looking aware of all information out there-sometimes its assumed that market prices even reflect information that is not public.
He thinks that Macro has responded effectively to the charge there's no finance in its models.
"This was somewhat true for a very short time following the 2008 crisis. Why? Because it takes a few months to write papers and get them out there. It is true that before 2008, finance didn't get much attention in macro models. But instead of sticking their heads in the ground, top macroeconomists responded to the crisis by racing to make models in which the financial sector drives recessions. For example, in 2009, Michael Woodford and Vasco Curdia came out with "Credit frictions and optimal monetary policy", and in 2010, Larry Christiano and coauthors came out with "Financial factors in economic fluctuations". Those are two top macro guys, but early efforts like those were only the thin edge of a very large wedge. As of now, practically every macro paper I see, from top people, young entrants, and central bank economists includes "financial frictions", "financial shocks", "credit frictions", a banking sector, leverage restrictions, or something along those lines. Financial macro is absolutely the In Thing right now. And there has been increased interest, attention, and recognition directed toward economists who were thinking about the financial sector before 2008."
"Basically, the speed with which macro has put finance at the center of its theories of the business cycle has been nothing less than stunning."
So there was no finance in the models before 2008 but now Macro has fixed that? There is a recognition among people like Woodford who Smith mentions and Krugman that Macro needs finance. However, it's certainly debatable whether they've quote gotten it right yet. It's a good step that they at least see the need.
Cullen Roche talks about how important finance is becoming.
"The evidence of growing interest in macro finance is obvious to anyone in the field. The news is dominated by top down stories these days. Whether it’s Ukraine, Europe, emerging markets, the Fed, macro indicators, etc. These are the stories that are increasingly driving asset prices and markets. After all, we don’t live in localized economies any longer. The S&P 500 and most global markets are macro markets now. Understanding your domestic economy simply doesn’t give you the full picture. And this is not unique to the equity markets. Commodities, futures, bonds and just about all markets are becoming increasingly global in nature which means that the big picture matters more than it ever has."
"So I’d say Noah is downplaying macro to a large degree. The field of macroeconomics as practiced by macro economists is just a small slice of the macro landscape. Macro finance is growing by leaps and bounds and becoming increasingly important. And as macro becomes more important to the world of practitioners macro economists are being forced to adapt and apply models and understandings that become more useful to practitioners and policymakers. As of now, most of the models and understandings that macroeconomists are using aren’t terribly useful to market practitioners. That will change because the field will force it to change. And the economists who don’t change/adapt will be left behind…."
http://pragcap.com/why-macro-is-becoming-the-dominant-financialeconomic-perspective
The importance of finance is becoming so apparent that even Sumner can't wholly dismiss it like he once did.
http://diaryofarepublicanhater.blogspot.com/2014/03/scott-sumner-im-no-expert-on-financial.html
I don't think Macro is a finished product at this point. I think you're going to see an evolution in Macro of many different elements. It's not going to change overnight like it did with Keynes after the GT or Lucas in the 70s. What's clear already is that macroeconomics already gets that it can't just ignore finance anymore.
No comments:
Post a Comment