the future of macroeconomics - european central bank · the future of macroeconomics a discussion...
TRANSCRIPT
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The Future of MacroeconomicsA Discussion of a paper by John Muellbauer
Prepared for the ECB Colloquium in Honour of Vítor ConstâncioBy
Roger E. A. FarmerUniversity of Warwick and NIESR, Wednesday 16th May 2018
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 1
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Three Themes of John’s Paper1. DSGE models are deeply flawed2. Insights from the ‘information revolution’
have been ignored particularly with regard to financial markets
3. John provides some insights from his own work on forecasting inflation and business cycles
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 2
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Three Themes of my Discussion• How should we incorporate information
theory?• Not just amplification! Continuum of steady
state unemployment rates! i.e. hysteresis!• Forecasting: Is hysteresis due to demand or
supply?
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 3
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The Great Depression
20,000
30,000
40,000
50,000
60,000
70,000
80,000 0
5
10
15
20
25
301929 1930 1931 1932 1933 1934 1935 1936 1937 1938
The Real Value of WealthUnemployment Rate
Unemployment and Wealth During the Great Depression
Shaded areasare recessions
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 4
The financial markets mattered in 1929!
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The Great Recession
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000 4
5
6
7
8
9
10
11
122001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The S&P 500 Measured in Wage UnitsUnemployment Rate
Unemployment and the Stock Market During the Great Recession
Shaded areasare recessions
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 5
The financial markets mattered in 2008!
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Post-War Unemployment and the Stock Market
6
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0 0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.650 55 60 65 70 75 80 85 90 95 00 05 10
The Unemployment Rate (transformed)The Log Ratio of the S&P to GDP
Unemployment and the Stock Market
Shaded areasare recessions
UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer5/12/18
Unemployment and the stock market are non-stationary and co-integrated
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Wicksell’s Rocking Horse Model
• This picture shows how the New-Keynesian model responds to a shock
• It is an example of a rocking-horse model
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 7
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A VAR converges to a point
5/12/18UCLA, University of Warwick, and NIESR. (c)
Roger E. A. Farmer8
Δ"
Δ#
Δ" = 0
Δ#=0
Conventional models are represented by VARs
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The Windy Boat Model
5/12/18UCLA, University of Warwick, and NIESR. (c)
Roger E. A. Farmer9
• This picture shows how model with hysteresis responds to a shock
• It is an example of a windy-boat model
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A VECM converges to a set
5/12/18UCLA, University of Warwick, and NIESR. (c)
Roger E. A. Farmer10
Δ"
Δ#
Δ" = Δ#=0
Any point on
the green line
is a possible
equilibrium
We need
models
represented by
VECM’s where
unemployment
may be non-
stationary
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This is What Happened in the Data
5/12/18UCLA, University of Warwick, and NIESR. (c)
Roger E. A. Farmer11
• GDP per person still has not returned to trend eight years later after the collapse of Lehmann Brothers
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If it Looks Like Duck….
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 12
…swims like a duck and quacks like a duck…
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Conclusion• Yes DSGE models are flawed: • Yes we can learn from the information
revolution but tweaks and frictions are not enough
• Key question for policy makers: Can we affect the long-run unemployment rate through monetary and fiscal policy?
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 13
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Thank You for Listening
Hmm… Perhaps I need to buy his book
5/12/18 UCLA, University of Warwick, and NIESR. (c) Roger E. A. Farmer 14