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Month: December 2012

Population aging: Japan again

The sort of models we examined proliferate. Below is an abstract and link for the latest, which adds an open economy component. Their model differs in many details from that of Fehr et al., including how productivity is incorporated, when and at what level government debt stabilizes (after which tax rates become endogenous) and on and on. Rather than writing my own paper on Fehr et al let me instead comment on this paper.

What do we know?

Here is an excerpt from a December 5th blog post Evidence in Macroeconomics by Paul Krugman. It’s a nice summary of our readings on how to test the size of the multiplier, the challenge posed by endogeneity, and hence the value of “natural experiments.”

Anyway, where Noah [Smith, link] goes too far is in asserting that this kind of thing means that we basically know nothing [in critiquing David Beckworth here]. Um, no — good economists have been aware of this problem [endogeneity] for a long time, and serious work on both monetary and fiscal policy takes it into account. How? By looking for natural experiments – cases of large changes in policy (so that policy is the dominant factor in what happens) that are clearly not a response to the state of the business cycle.

That’s why Milton Friedman and Anna Schwartz’s monetary history wasn’t just about correlations; it relied on a narrative method to attempt to show that the monetary movements it stressed were more or less exogenous.