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Saturday, January 02, 2016

'Making And Using Models'

Paul Krugman:

Making And Using Models: Larry Summers, Brad DeLong, and yours truly are having a bit of a three-cornered dialogue about the role of models in policy, set off by Larry’s initial post about why he believes the Fed is making a mistake in raising rates. We’re now in round two – and before I get to the specifics, let me ask: Don’t you wish real life were like this? (Let me pull Marshall McLuhan John Maynard Keynes out from behind this sign.)
I mean, we’re having a serious discussion by people who have thought hard about these topics, and more than that, have a long history of hard thinking about economics. To the extent that the three of us differ, it’s not based on knee-jerk ideology, or simplistic slogans. Oh, and on the immediate question of whether the Fed should raise rates, we’re all agreed that it should not.
Compare this with what mainly happens in economic debate. Oh well.
Anyway, Larry now comes back with an assertion that his case against a rate hike rests largely on supply-side uncertainty, where I think textbook demand-side economics is already enough; and also with a statement that he’s OK in principle with policy judgments that aren’t based on models, and a critique of my Mundell-Fleming lecture arguing that policymakers’ fears that deficits can cause a disastrous loss of confidence don’t make sense. Brad responds by wondering exactly how the policymakers could be right in this case.
And that really gets at my point, which is not that existing models are always the right guide for policy, but that policy preferences should be disciplined by models. If you don’t believe the implications of the standard model in any area, OK; but then give me a model, or at least a sketch of a model, to justify your instincts. ... [he goes on to explain further] ...

    Posted by on Saturday, January 2, 2016 at 08:27 AM Permalink  Comments (32)


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