Saturday, January 25, 2014

The Best Discussion Of The Brief History Of Macroeconics That I Have Read

Noah Smith got his undergraduate degree in physics and he decided to pursue a PhD in economics because it interested him.  He found that the mathematics that he learned in physics was useful to him since economics had been on a path to emulate what it believed to be science.  Since receiving his PhD his blog has focused a lot of attention on the adequacy of economic models in predicting outcomes or explaining real economic phenomena.  This article brings many of his ideas together and the comments that follow are thoughtful and provocative.  While it is primarily for those with some background in economics, it is written very well and it leads to an important conclusion.  The macroeconomy is just to damn complicated to describe mathematically.

One thing that most can take from this article is the war between the Chicago crowd and the so called freshwater economists, is largely a battle over methodology and technique.  Both sides use DSGE models to describe the economy.  The saltwater DSGE models are used by most central banks in the world but the Chicago models have been dominant in academics.  The Chicago group and the freshwater crowd also disagree about an important issue.  The Chicago group has build its theory around the assumption that fiscal stimulus by government cannot moderate the business cycle.  The freshwater economists tend to support the use of fiscal policy.  Consequently, the war between these two schools of thought is practically important. 

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