The substantive piece of John Quiggen’s criticism of New Keyensian macro is that the analysis is limited to looking at deviations of the economy around some set point. If the economy gets far away from that point, the analysis may not apply. His mistake was assuming the set point was the Smithian or neoclassical ideal, but in the NK models this isn’t the set point.
Nevertheless, to analyize these models, we do local analysis. Everybody does local analysis, so this criticism actually applies not just to New Keyensian macro but to most modern macro. I’ve actually been worried about this problem sense I realized this is what I was doing when I solved those models.
Ken Judd — Stanford’s computational economics god — gave a seminar at Davis yesterday and he made me feel much better about these techniques. While discussing this paper, he defended so-called perterbation methods by appealing to the authority of physics. They do it, so its ok for us to do it. Apparently, to solve the equations of general relativity, physicists perterb the system around the no mass solution. In other words, the set point that they do local analysis around is a universe with no mass in it! Not only that, because they’re doing local analysis (and like in economics “local” is undefined), their analysis suggests the universe is stable only up to an undetermined point of time. Outside that time interval, the local area of analysis, the results of general relativity may not apply ((BTW, IANAP (physicist) and neither is Judd, but he’s a smart guy and as long as I didn’t misunderstand him, I believe what he told us. Corrections are welcome.)). Yike!
That said, there are still problems with the way most macro folks do local analysis — we linearize when we probably should use higher order local approximations ((Although, a professor told me there’s very few cases where linearization can lead you astray. Unless you’re studying precautionary motives or other behaviors that depend on second moments, linearization should be ok.)) — and if all of us picked up a copy of Judd’s textbook (and read it!) we’d be better off.