Saturday, July 18, 2015

Scott, the serious flaw is expectations

Good ad hoc is building a model out of several assumptions that come together to achieve the result you want. Bad ad hoc is a single assumption that is effectively the result you want. The picture on the left is the result of a central bank setting expectations of a horse in a good ad hoc model; the picture on the left is the result of a central bank setting expectations of a horse in a ratex or other expectations-heavy model.
Still on the light blogging/hiatus, but I am having trouble parsing this sentence from Scott Sumner:
I am increasingly confident that [the neo-Fisherites] have stumbled on something important, a serious flaw in the [New Keynesian] model.
Is the flaw the ability to get any result you want just by making different assumptions about expectations? Isn't that flaw in every macroeconomic model of expectations? Rational expectations just shifts that ability to get any result to the mechanics of the model itself (i.e. you just take off the E's in a ratex model).

Scott changes a sentence from Noah Smith to better get as his (Scott's) point at the link at the top. I'll do the same here; I'd rather Scott had said:
I am increasingly confident that [the neo-Fisherites] have stumbled on something important, a serious flaw in macroeconomics.
More here:
In the information transfer framework, I take expectations to be part of the so-complicated-it-looks-effectively-random theory of agent behavior (more about this in the context of a traffic model here).

1 comment:

  1. I finally understand that illustration of good and bad ad hoc. The paragraph you added as a label helps a lot!

    ReplyDelete

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.