Rational Expectations and Econometric Practice (Volume 2)

"There are several groups. There’s the divide between the New Keynesians who believe both monetary and fiscal policy are effective policy tools, the modern version of the monetarists who believe in monetary but not fiscal policy, and the Real Business Cycle economists who don’t think either type of policy is effective. The big split is the first one, monetarists versus Keynesians to use an older terminology — That’s people like Lucas and Sargent people like me, Krugman, Brad DeLong and others. Then there’s another, much smaller group that don’t think any of us have a clue. Those are the heterodox economists. They don’t like the tools and techniques we use, they don’t like equilibrium models. It’s people like Jamie Galbraith, who don’t agree with either side. I would describe him as traditional-minded. He certainly uses the same tools, though he pushes them to a bigger extreme than others would. He’s not saying: Throw out the toolbox, throw out everything we’ve learned in the last 30 years and let’s take a completely new tack using different kinds of models altogether. Though maybe that’s where we’ll end up as a result of this crisis. Economists don’t disagree about certain things. And doctors do disagree about things, especially over time – like whether eating certain foods can reduce cholesterol. There’s a big controversy right now about whether you should take vitamins or not, whether it’s helpful or harmful. When doctors have difficulty testing things experimentally, they run into the same issues as we do. When there’s just historical data, like we have – if, for example, they try to figure out heart disease by looking back at people’s lives – then a lot of the time they get things as wrong as we do. Doctors have changed their advice many times. Yes I do, completely. The reason is that we don’t have data for historical episodes like this one. The Great Depression was like this, but our data pretty much ends in 1947. We can’t go back any further with anything close to reliable data. As an econometrician I can estimate these multipliers, but they’re for good times not bad times. I don’t have the data that I need. I don’t have enough big recessions like this one in my data set to give a precise answer."