One more on macro from Kocherlakota. Everything on his list seems right to me. As I’ve pointed out before, he notes that macro folks (at least those that got their PhD since 1990) have studied heterogeneity, frictions, bounded rationality and government intervention and they’ve done so at the core of their research agendas. He points out that the salt/fresh water divide doesn’t exist these days. He admits, though, there’s been little study of financial frictions, but its worth pointing out that few macro models assume complete financial markets.
Two of his observations are very close to what I was saying a while ago. In a post called “the extent of our knowledge“, I talked about how macro models hide what we don’t know in so-called exogenous shocks. If you want to know what a macro model isn’t telling you, you look at the shocks and Cogley and Nason taught me that lots of stuff can be hiding in those shocks. Kocherlakota says,
The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables.
Second, he points out that macroeconomists are a technical sort of people and they don’t talk much. This is bad for me because, while I like to geek out, I’m more of a talker. Its also bad for the profession because it means we do a bad job at communicating our ideas to lay people and to other economists. Early in the crisis, when everyone went all Keynesian, I was lamenting that the best ideas in modern macro aren’t in the text books.
One of his throw away lines: “some departments have shockingly few young tenured scholars in this important field (including large departments like Harvard and Princeton [and Berkeley]).” And this may explain why Krugman (and Delong) have a hard time appreciating the current state of macroeconomics. They don’t know any modern macroeconomists.