April 14, 2015

Reduced-form bricolage and sticky brains

Comment on Stephen Williamson on ‘Sticky Prices, Financial Frictions, and the Ben Bernanke Puzzle’


Stephen Williamson cannot explain how the monetary economy works, instead he tells us how economists work.

“For convenience, NK models — which at heart are well-articulated general equilibrium models — are sometimes (if not typically) subjected to linear approximation, and reduced to two equations. One is an "IS curve," which is basically a linearized Euler equation that prices a nominal government bond, and the other is a "NK Phillips curve" which summarizes the pricing decisions of firms. ... The basic idea is that this reduced form model is fully grounded in the optimizing, forwardlooking behavior of consumers and firms, and so conforms to how modern macroeconomists typically do things (for good reasons of course).” (See thread intro)

Unfortunately the basic idea is wrong and there is actually not one methodologically sound reason for how modern macroeconomists typically do things. No doubt about it, modern macroeconomists are irrecoverably lost in the proto-scientific wood (2014b; 2014a).

There are two kinds of macroeconomics: true or false. Clearly, NK-RBC-NC falls squarely into the second class. As a matter of principle, all well-articulated general equilibrium models are false. Hence it is pointless to discuss their irrelevant differences.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL