He claims modern macro is only mathematical masturbation, that its not empirically relavent, it ignores unemployment and the modern consensus was reached in the discipline by ignoring critics. He’s wrong, very wrong, on all counts. Also, he seems to misunderstand the modern critique of macroeconometric models — the so-called Lucas Critique ((I’m too lazy to write out what he gets wrong about the problem with macroeconomic models. The fundamental problem with them has little to do with the statistical power of the tests used to test those reduced form models, as Kling claims. Basically, Lucas argued reduced form systems of equations didn’t tell us much with making policy because they only reflected averages of past behavior and they didn’t provide understanding of underlying mechanisms. When the underlying environment changes in some fundamental way, like there’s a change in policy, the past correlation between variables may no longer hold. Its a variation on the theme of correlation not being causation.)).
Macro-theory is math heavy and it has become more so over time. Part of this is pure mathematical masturbation, no doubt, but to a large part this trend is driven by a desire to make explicit all the assumptions that are being made and to more precisely understand the implications of those assumptions.
The need for more math is also related to the increase in the empirical relevance of theory. I’m convinced the only standing legacy of the Real Business Cycle literature, besides method, is its insistence on bringing the models to the data. In modern macro, its simply not enough to identify the existence of some effect or other. For example, real business cycles were relevent because they proved to be quantitatively important… a large chuck of business cycle fluctuations are driven by supply shocks. And RBCs have been supplanted because they didn’t explain enough of the data. The empirical relevance of real shocks couldn’t have been tested without out explicit mathematical models of the phenomenon.
This is what frustrates me about Kling, Krugman, et al’s ad-hoc theorizing. They seem contented to identify that certain macroeconomic features exist, but they don’t bother to quantify the importance of those features. For Kling, he identifies risk preference shocks as important drivers of the business cycle. Fine. How important are they? Well Kling never attempts to answer that question, but these shocks have actually been studied and they’ve been found to be empirically insignificant.
For Krugman, its all about what I call “weak” liquidity traps ((He defines a liquidity trap as a period of zero short term interest rates. This is a “weak” definition because the concern with liquidity traps is that they make monetary policy ineffective. I’ve mentioned before there’s a quite significant literature that shows monetary policy is not ineffective at zero rates of short term interest. Certainly, routine monetary policy where the Fed and banks swap treasuries for cash is ineffective at this lower bound for interest rates, but routine policy isn’t the only policy tool available to the Fed.)). There’s no discussion of magnitudes; its never asked just how important is this fact to our present predicament. Interest rates are zero and to Krugman this is the only salient fact about the macro-economy.
Macro has moved on from real business cycles — even if Kling’s criticisms seem not to have — but it has maintained the discipline of bringing the models to the data. Whole books have been written on how to estimate so-called DSGE models.
Time-series techniques have come a long way since Box-Jenkins — VARs and what have you. More importantly, applied theorists use those techniques to test theory. Its rare to find theory papers that don’t have data sections where there’s at least a nominal attempt at testing the implications of the model.
Real business cycles ignored unemployment. True. Modern macro, on the other hand, has been modeling and testing ideas about unemployment for two decades. My own research is a version of a general equilibrium employment search model. Here’s a DSGE model with unemployment. And look at that, there’s even a data section where the model is tested. How about that!
I’d say, if you had the time, you could pick through Kling’s quite good macroeconomic lecture series and find each element studied somewhere in the modern macro literature. Of course, its not his fault that he not up on the recent literature in macro. I’ve made the case that we in the macro field need to do a better job of evangelism. That said, he should be aware that much research has been done since the 70’s and most of it isn’t real business cycles and lots of it touches on the “fundamental issues of macro.”