IMPULSES AND PROPAGATION MECHANISMS IN EQUILIBRIUM BUSINESS CYCLES THEORIES: FROM INTERWAR DEBATES TO DSGE “CONSENSUS” Documents de travail GREDEG GREDEG Working Papers Series Muriel Dal Pont Legrand Harald Hagemann GREDEG WP No. 2019-01 https://ideas.repec.org/s/gre/wpaper.html Les opinions exprimées dans la série des Documents de travail GREDEG sont celles des auteurs et ne reflèlent pas nécessairement celles de l’institution. Les documents n’ont pas été soumis à un rapport formel et sont donc inclus dans cette série pour obtenir des commentaires et encourager la discussion. Les droits sur les documents appartiennent aux auteurs. The views expressed in the GREDEG Working Paper Series are those of the author(s) and do not necessarily reflect those of the institution. The Working Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate. Copyright belongs to the author(s).
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Impulses and propagatIon mechanIsms In equIlIbrIum busIness cycles theorIes: From Interwar debates to dsge “consensus”Documents de travail GREDEG GREDEG Working Papers Series
Les opinions exprimées dans la série des Documents de travail GREDEG sont celles des auteurs et ne reflèlent pas nécessairement celles de l’institution. Les documents n’ont pas été soumis à un rapport formel et sont donc inclus dans cette série pour obtenir des commentaires et encourager la discussion. Les droits sur les documents appartiennent aux auteurs.
The views expressed in the GREDEG Working Paper Series are those of the author(s) and do not necessarily reflect those of the institution. The Working Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate. Copyright belongs to the author(s).
Abstract. It is tempting to understand the DSGE (Dynamic Stochastic General Equilibrium)approachasarefinementofearliercontributions,namelySlutsky(1927)andFrisch(1933),andtoalesserextentHayek,Hicks,andLutz.Byanalyzingthedebatesintheseperiods,wetrytoshow that themodern tools fromwhich our theories benefit, far frombeing neutral, havedeeply changed the nature of business cycles theories. We identify the reduced role ofpropagationmechanisms inDSGEmodels and their consequences for current debates. Theoveremphasisonthecapacityofmodelstomimiccyclicalfluctuationsontheoneside,andtheclearincapacityofthesemodelstoexplain(eventomimic)largescalecrisesontheother,aredistinctbutconvergentelementswhichrevealadeepchangeintherelationshipbetweentheempirical findings (data, stylized facts) and the theory. These elements are deservingmoreattentionfromhistoriansofeconomicthought.
Keywords: equilibrium business cycles theories, dynamics, impulse, shocks, propagationmechanism(s),empiricalvalidation,calibration,crisis.
13ForamoredetailedcomparativeanalysisseeHagemann(1994).WhenLucaspresentedhis“UnderstandingBusinessCycles”(Lucas1977)attheKielConferenceonGrowthwithoutInflationinJune1976heseeminglywasunaware that in his Vienna habilitation thesis Hayek had reacted to Löwe`s habilitation thesis (1926) whichqualifiedLöwetobecomethefoundingDirectorof theDepartmentofBusinessCyclesat theKiel InstituteofWorldEconomicswherethe1976conferencetookplace.
essentially is amonetary (overinvestment) theory,he feltobliged to separatehis approach
fromallmonetary tradecycle theorieswhichproceed fromchanges in thegeneral levelof
14ItisdebatablewhetherHayekreallyhadaWalrasiannotionofequilibriuminmind.SeeArena(1994,p.211)who points out that “[t]here is little common room between Walras’s tâtonnement and Hayek’s marketdiscovery”.15However,thisinterpretationneedstobequalifiedduetoHayek’sfurtherreferencetoJamesMillandSay,aswellasthefactthatthisnotewasnotincludedinhisoriginalGermantextGeldtheorieundKonjunkturtheorie.16Hickswhoconsideredtechnologicalchangeasmorefundamental,hadalife-longcontroversywithHayekforwhommonetarydisorderswereoffirstimportance.SeeHagemann(1998).
the logicofequilibrium theory…-properly followed through, candonomore thandemonstratethatsuchdisturbancesofequilibriumcanonlycomefromoutside–i.e.thattheyrepresentachangeintheeconomicdata–andthattheeconomicsystemalways reacts to such changes by itswell-knownmethods of adaption, i.e. by theformationofanewequilibrium.(Ibid:42-43)
the idea of equilibrium is the result of thinking through processes of economicchange, it is the product of the recognition that the economy tends towardsequilibrium…thestatictheoryiswellabletodealwiththetaskswhichClarkassignstothedynamictheory.Itsdomainnecessarilyincludesproblemsofchange.Thesameforcesoperateindynamicsasinstatics,butinthelattercasetheyareinbalance.Staticsisreallybutabranchofdynamics,asMarshallputsit....themerefactthatbusinesscycletheorydealswithprocessesofchangedoesnotmeanthatitispartofadynamictheoryratherthanthestaticone.(Lutz[1932]2002:187-188n.2)
23SeeAndvig(1981:708).24Seethefinalsection6ofhis1933essay.25Thelatterattitudewasquitecommon, inparticularamongmonetarytheoristsofbusinesscycles, includingleadingrepresentativesofschoolsasdiverseastheCambridgeandAustrianones.26 Frisch´s 1938 paper is considered by many historians of economic thought (Morgan 1990) but also byKoopmans,RubinandLeipnik(1950)asaseminalcontributiontotheproblemof identification(seeBoumans1995:130).27Foradetailedanalysisoftheimportanceoftheseeconometricdevelopmentsandtheirinfluenceonbusinesscycletheories,seeBoumans(1995).
(…) viewing a commodity as a function of stochastically determined shocks… insituationinwhichinformationdiffersinvariouswaysamongtraders…permitsonetouse economic theory to make precise what one means by information, and todeterminehowitisvaluedeconomically.(Lucas1981:707)
30Thenotionofequilibriumisherequitedifferentfromtheoneusedintheinterwarperiod.Formanyeconomistsof that period (except for economists such as Lowe or Kuznets), equilibrium and disequilibrium wereencapsulatedconcepts.ThisisnotanymorethecaseforLucas’sREHequilibrium(seedeVroey2016:176-186).AsDavidLaidleremphasized,“thedifficultywiththenew-classicaleconomicsliesnotintheequilibriumpostulateperse,butinitsinsistencethatwemodeltheeconomyasawholeasiftheequilibriumstrategiesofindividualswereformulatedandexecutedinaninstitutionalframeworkcharacterizedbycontinuouslyclearingcompetitivemarkets”(1986:349).Formoredetailsonthebuildingprocessofthenewclassicalschool,seeDalPont(1999)ordeVroey(2016).
I cannot say the same about the use made of the intertemporally- optimizingrepresentativeagent.Maybe I revealmyselfmerelyasold-fashioned,but I seenoredeeming social value in using this construction, which Ramsey intended as arepresentationofthedecision-makingofanidealizedpolicy-maker,asifitwereadescriptivemodelofanindustrialcapitalisteconomy.Itaddslittleornothingtothestory anyway, while encumbering it with unnecessary implausibilities andcomplexities.(Solow1994:49)
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Convergence towards a single model was accompanied by acceptance of new criteria
Theidentificationproblemmeansthattogetresults,aneconometricianhastofeedinsomethingotherthandataonthevariablesinthesimultaneoussystem.(…)ThecurrentpracticeinDSGEeconometricsisfeedinsomeFWUTV’s(factswithunknowntruthvalue)by“calibrating”thevaluesofsomeparametersandtofeedinotherstightBayesian Priors. As Olivier Blanchard (2016) observes with his typical
(…)microeconometric estimates routinely incorporate heterogeneity that is oftenabstractedfromthespecificationofdynamic,stochasticgeneralequilibriummodels(…),giventhatunderstandingthedistributionofheterogeneityiscentraltomakingthistransition(…)”(HansenandHeckman1996:101).
This argument echoes that one already developed by Cogley andNason (1995)when they
My general preference is for small, transparent, tailored models, often partialequilibrium, usually aimed at understanding some little piece of the (macro-)economicmechanism. I would also be for broadening the kinds of data that areeligibleforuseinestimationandtesting.Oneoftheadvantagesofthisalternativestyle of research is that it should be easier to accommodate relevant empiricalregularitiesderivedfrombehavioraleconomicsastheybecomeestablished.
What did the crisis reveal that we did not know before? Possibly, not much. However, it
33SeethespecialissueRebuildingMacroeconomicTheoryeditedbyVinesandWills(2018)34 See the last symposia “Macroeconomics a Decade after the great Recession” in the Journal of EconomicPerspectives,32:3,summer2018.
evolved. This remains part of the history of modern macroeconomics which is not often
carefullydocumentedbyhistoriansofeconomicthought.
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Documents De travail GreDeG parus en 2019GREDEG Working Papers Released in 2019
2019-01 Muriel Dal Pont Legrand & Harald Hagemann Impulses and Propagation Mechanisms in Equilibrium Business Cycles Theories: From Interwar Debates to DSGE “Consensus”