Yale's Ray Fair, well-known for his economic model predicting the outcome of presidential elections, has a new forecast out on the macroeconomic effects of large budget deficits -- and it's not pretty:
Fair's model, which has it roots in the large-scale aggregate models pioneered by the Cowles Commission, differs fundamentally from the state-of-the-art DSGE models that the rational expectations revolution of the 1970's helped bring about. Fair has another new paper where he compares his model to the new breed and argues that the old way of doing things was less theoretically restrictive. It's worth a read if you can wade through all the technicals. Still, we shouldn't forget that Cowles Commission-style models were originally discarded because they failed to predict the economic gyrations of the '70s.
Meanwhile, over at VoxEU, Dirk Bezemer makes a case that the chief problem with the models used by the likes of the Federal Reserve and ECB is not that they assume rational expectations, but that they don't properly account for the impact of the financial sector on the economy:
If the crisis and recession teach us one thing, it is that the financial sector is just as real as the “real economy”. We economists – and the policymakers who rely on us – ignore balance sheets and the flow of funds at our peril.
Nine months into Barack Obama's administration, a few of his appointees still haven't been confirmed by the U.S. Senate. Click through for a rundown on some of the remaining people who haven't been confirmed, and why.
Read our best pieces on the environment.
The good, the bad, and the ugly of environmentalism.
A fate worse than global warming.
Understanding the construct we call Nature.
Do we need a technological breakthrough to avert the climate crisis?
The Sierra Club's strange bid to drain a lake.
The sleazy lobbyist who might save the world.
Intellectual rigor. Honest reporting. Influential analysis. Don't miss another issue of the magazine considered "required reading" by the world's top decision-makers. Subscribe today.
Read Full Article »