Initial Comments On Roger Farmer's Macro Models

link to best summary). It has been awhile since I in conclusion looked at his papers, in addition to so I am non sure whether his piece of work has the same issues.

His models looked interesting, simply I never pursued them because I was however thinking inward a conventional manner. My diagnosis at the fourth dimension was that applying such models to occupation concern bicycle forecasting would human face upwardly problems. However, my thinking has evolved -- I realise that I desire to piece of work with models that are difficult to apply to the existent world. Furthermore, his models are built around what I persuasion equally the fundamental concept -- beast spirits.

If 1 wants to survive sarcastic, 1 could liken "conventional" approaches to macro equally believing inward ghosts. The "ghosts" are diverse not-directly-measured variables that drive the models. The fundamental examples being:

• the natural charge per unit of measurement of interest;
• potential GDP;
• NAIRU (or equivalent).

(As a disclaimer, I appealed to those concepts dorsum when I was churning out conventional marketplace position research.)

Serious economists own got gotten used to dealing with this ghostly quantities, in addition to many inward fact volition non process people who turn down them equally beingness serious. Unfortunately, all of these variables are defined inward such a way that they generate easily testable predictions -- in addition to nosotros tin empirically turn down those predictions. This has left the truthful believers using methodologies which resultant inward these variables vehement chop-chop around, allowing them to jibe whatsoever observed information ready (making their utilization non-falsifiable).

The thought is to add together "animal spirits" to the listing of these not-directly-measured variable. The beauty of beast spirits is that it is past times Definition vague, in addition to and so has a lot to a greater extent than flexibility to avoid rejection. The inquiry is: tin nosotros construct mathematical models around it?

This is of utmost importance for occupation concern bicycle models. It takes a rattling large amount of teaching to believe that criterion DSGE macro models offering whatsoever insight to occupation concern bicycle analysis. ("Everyone decided to accept a opor-garai inward 2008!") The models are built around identify sector optimisation over fourth dimension -- the occupation concern sector alone blindly reacts to prices (both topographic point in addition to forward), in addition to does non invention ahead. This patently bears no resemblance to existent globe behaviour.

I own got no thought who coined the term "animal spirits" inward conjunction with the occupation concern cycle, simply Keynes sure enough popularised it. The concept is straightforward -- businesses ramp upwardly hiring in addition to investment if they recollect the futurity volition characteristic higher demand. This creates a self-reinforcing impetus to growth. Unfortunately, that self-reinforcing nature plant backwards inward a recession. This mechanic is bizarrely missing from criterion DSGE macro.

Where I believe that Professor Farmer in addition to I depart theoretically is the measuring of beast spirits. He argues that stock marketplace position prices ought to embody the degree of beast spirits, in addition to and so nosotros tin utilization the stock marketplace position equally a proxy for this variable. If the stock marketplace position operated inward fifty-fifty a slightly rational fashion, the logic behind that illustration is strong. Nevertheless, I own got doubts nigh the link, largely based on my observations of stock marketplace position behaviour. Since it has been awhile since I own got read his analysis of the topic, I volition defer the give-and-take of policy to subsequently articles.

In particular, he is travel of the growing chorus of voices inward favour of sovereign wealth funds. In his case, he believes that the sovereign wealth fund tin human activity to stabilise run a peril property prices, in addition to thence beast spirits (according to his framework). My feeling is that sovereign wealth funds own got evolved to survive the principal complimentary luncheon available to policy makers inward the "neo-liberal consensus" (which way I should larn around to writing nigh them).

(To necktie into my recent articles, I instead combat that credit markets are to a greater extent than of import practically. To a sure extent, the Canadian authorities blundered into a policy that explicitly targets beast spirits: its guarantee of mortgage insurance via CMHC guarantees. The housing marketplace position has larn an economical laboratory for the Canadian federal government.)

One in conclusion number that I human face upwardly is the inquiry of how to relate his piece of work to the existing post-Keynesian theory. In his book, Professor Farmer refreshingly acknowledged the existence of post-Keynesian economics, which is unfortunately odd with "mainstream" economists. He sets out his reasons for disagreement with post-Keynesian authors. I would non survive able to comment on those disagreements until I delve deeper into his work.

(c) Brian Romanchuk 2018