Tuesday, December 02, 2008

No science, no consensus

Arnold Kling talks about the 180 degree turn macroeconomists have taken on fiscal stimulus.

Michael Crichton's view on science and consensus being mutually exclusive here.

UPDATE: Greg Mankiw inspired Arnold's post (first link, above):
Many macroeconomists, however, are skeptical of the Keynesian model. And even among modern Keynesians, there is disagreement about specifics. I think it is fair to say that short-run business cycle theory remains one of least settled parts of economics. Any economist approaching the subject should bring an ample dose of humility. (The alternative is a surfeit of hubris--a character trait all too common among economic commentators.)

The Keynesian model has some clear, practical insights about how to think about fiscal policy during economic downturns. But are those insights true?

One approach to answering this question is to examine the data using the techniques of time-series econometrics without imposing much a priori theory. For monetary policy, there is a large literature that does this; for fiscal policy, the literature is smaller but growing. The results from this exercise, however, do not always confirm the predictions from textbook Keynesian models.

A huge nugget:
An earlier, related paper by Olivier Blanchard and Roberto Perotti called "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output" reported similar anomalous results:
... we find that both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is consistent with a neoclassical model with distortionary taxes, but more difficult to reconcile with Keynesian theory: while agnostic about the sign, Keynesian theory predicts opposite effects of tax and spending increases on private investment. This does not appear to be the case.

No comments:

Post a Comment