2 Nobel Prizes- 2 Amer. Econ's- ‘Rational Expectations’/fiscal theory of price level

Discussion in 'Economy' started by Trajan, Oct 11, 2011.

  1. Trajan
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    Trajan conscientia mille testes

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    imagine that, you actually have to prove that there is " cause and effect" amongst tax/spending/business and, that people and biz. actually move differently to monetary than Keynes may have thought........*sigh*


    A Nobel for Non-Keynesians
    People's expectations about government policy make it difficult for officials to affect the economy in the ways they intend to.

    snip-

    The Swedish economists announcing the award emphasized, correctly, the importance of Messrs. Sargent's and Sims's thinking about the role people's expectations play in economic decision making and the larger economy. But what they failed to mention is that their work has also offered empirical evidence that the school of thought known as Keynesian economics—which believes that government can turn a flagging economy around with the right combination of fiscal "stimulus" (generally government spending) and monetary policy—is fallible.

    Mr. Sargent was an early and important contributor to the "rational expectations" revolution in macroeconomics, an area for which his sometime collaborator, Robert E. Lucas Jr., won the Nobel Prize in 1995. One of Mr. Sargent's key early contributions, along with University of Minnesota economist Neil Wallace, was the idea that people's expectations about government fiscal and monetary policy make it difficult for government officials to affect the economy in the ways they intend to.

    If, for example, people get used to the Federal Reserve increasing the money supply when unemployment rises, they will expect higher inflation and will adjust their wage demands higher also. The result: The lower unemployment rate that the Fed was trying to achieve with looser monetary policy won't happen.

    This conclusion was at odds with the Keynesian model, which dominated economic thinking from the late 1930s to the early 1970s. The Keynesian model posited a stable trade-off between inflation and unemployment. In 1970, major U.S. econometric models, built on Keynesian assumptions, predicted that the government could get the unemployment rate down to 4% if it accepted an increase in inflation to 4%. In a 1977 article titled "Is Keynesian Economics a Dead End?" Mr. Sargent wrote, "nstead of 4-4, in the mid-1970s we got 9-9, a very improbable occurrence if econometric models of 1969 had been correct."

    snip-

    Mr. Sims's big contribution was to use a statistical tool, the vector autoregression (VAR), to model the macroeconomy and make macro forecasts. Why did Mr. Sims choose that approach? Because, he wrote in a path-breaking 1980 article, the standard macroeconometric models rested on "incredible" assumptions. He could avoid stacking the deck by basing predictions of future variables on their own past values, on the past values of other variables, and on what economists call "exogenous shocks."

    Mr. Sims does, of course, think beyond pure technique, and his research is always punctilious and often portentous. In 1999, for example, he suggested that the fiscal foundations of the European Union were "precarious" and that a fiscal crisis in one country "would likely breed contagion effects in other countries."

    more at-
    David R. Henderson: A Nobel for Non-Keynesians - WSJ.com
     
  2. Jackson
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    Jackson Gold Member Supporting Member

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    I read an interview with Thomas Sargent and found it fascinating about high unemployment and the unintended results of the safety net that unemployment insurance gives to that situation.
     

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