Buiter, good macro critic?

Google scholar and a minimal knowledge of the DSGE literature allows one to refute Buiter’s claims in less than 10 minutes. Someone should really give him a quick lesson on Google scholar.

No complete markets? Nope (first page of “dsge incomplete markets“).

No asset bubbles? Negative. (third result from this search: “dsge asset bubbles“)

Only linearization? Not really. (first result of this search “dsge nonlinear solution techniques“)

Can we have better macro critics please? Like this one or this one, I mean.

9 thoughts on “Buiter, good macro critic?”

  1. You see a lot of people repeating criticism that they have made before. The problem here is that others are more willing to listen to the malcontents because “economics has failed” because, gee, if it doesn’t have the right answer, to the 4-th decimal place, to any question, then it must have failed, right. Back to Keynes, the School of Salamanca or whoever.

    Maybe we should have a public, wide discussion on the standards by which we judge “failure”.

    So, yeah, I guess we should replace the (imperfect) rules of the current “game”, i.e. you can show it if you can show it in a DSGE model, with the discretion of this or that person’s idiosyncratic preferences…. good idea!

  2. “No asset bubbles? Negative. (third result from this search: “dsge asset bubbles“)”

    This paper says: “Moreover, a stochastic, non-fundamental component of stock prices is also assumed, in order to capture the observed variations in the equity risk premium.” i.e. we can’t explain why bubbles occur, so we’re just going to say it’s random! Look, why do monetary models have to resort to tricks like CIA and MIUF? Because without them, money _must_ have zero value – if it didn’t, it would be a bubble (i.e. something whose price was not determined by fundamentals). The same proof that shows money has no value proves that bubbles cannot exist in the standard macro model. Now, there are ways in which you can get them, but you need multiple agents and knowledge, something that hasn’t appeared in macro yet…

  3. ssendem – Buiter’s criticism was that the transversality conditions often assumed in macro modelling preclude the study of asset bubbles. The paper I cite studies asset bubbles affect on optimal monetary policy. This contradicts his claim.

    You may want to study how bubbles are formed, but that wasn’t the criticism of Buiter and there’s no reason, in principle, you couldn’t use the dsge framework to do so.

    Also, google scholar to the rescue again:

    No ‘knowledge’? Search for “dsge learning” or “dsge robustness sargent hansen” or “dsge adaptive agents”

    No heterogeniety? Search for “dsge heterogeneity”

    If one is truly interested in these topics (rather than wanting to bitch as someone), dsge is the perfect framework to learn about them. The modelling is straight forward and they can be tested in a number of ways. The implementation is a bit of bitch, but its getting easier as more and more tools are being introduced (or you could help introduce them!).

  4. Great page!

    A quick point from a non-macro non-econ guy – I understand you can find research that includes all the stuff that Buiter finds interesting in the SDGE models. However, as far as I see, the three papers above haven’t been published anywhere, much less in a top journal. Is that correct? Is it fair to say that these are outliners or interesting thought experiments, and don’t reflect the general consensus of those in the Chicago school?

    I think there’s an important distinction between papers and models that are floating around in the corners of academia or among a few specialized experts who only talk among themselves (the navel-gazing part) – and the expert advice given to (a) professionals outside the academy, and (b) the training of new graduate students. SDGE can come across as the critique Buiter portrays it as to the professional class (though I am rooting for the next generation!), and as far as I’ve seen/remember Ljungqvist/Sargent there’s little room for asset bubbles (or money).

    But I am an outsider on these things.

  5. That’s a fair question RB. Do papers about asset bubbles, learning and what have you get published in top journals? I don’t know and I’m too lazy to survey recent journals. I do know that Tom Sargent’s work on robustness and learning seem to be gathering steam.

    Some of the authors of the papers I cite are pretty well known (e.g. Schorfheide). These papers haven’t been published, but these topics are being addressed by “publishable” quality authors.

    In any case, I’m refuting Buiter’s claim that the dsge framework is good for nothing; that there’s a number of topics it assumes away or make impossible to study. Given papers have been written on the topics he mentions using the dsge framework, his criticism doesn’t have much bite.

  6. These papers do exist.
    But, most economists get their intuition from simple neoclassical growth models. Models with complete markets, log-linearlization, and no realistic asset pricing mechanism are the go-to models in graduate school economics. In undergrad, macroeconomics is even more of a sham. So, while people are trying to augment the baseline model with these extra features, the baseline model is still what passes for an informed opinion about economics.

  7. For “normal times” the neoclassical growth model is just fine.

    I will go as far as to say that it’s also fine for recessions/depressions as long as we interpret the variables properly. And yes, that means that I happen to believe what follows from this, i.e. no “crisis” in macro theory.

    It’s an “aggregate” model exactly because it sums up over stuff that’s otherwise/potentially/sometimes interesting at a less aggregated level. — It was once pointed [ http://yetanothersheep.blogspot.com/2008/10/microeconomics-to-rescue.html ] that micro theory has a lot to say about recent events. Too bad that not everything aggregates up neatly. Bo ho ho. Let’s al become ad hoc Keynsian-Marxian or something because of it.

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