Discussion of
“Benefits from U.S. Monetary Policy
Experimentation in the Days of
Samuelson and Solow and Lucas”
Timothy Cogley
Riccardo Colacito
Thomas J. Sargent
Ramon Marimon
Universitat Pompeu Fabra & CREi
Barcelona, April 1, 2005
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25+ years later
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Sims dixit (p.24):
“…if there is uncertainty about the structure of
the economy, then even with a fixed policy
objective function, widely understood, the
form of the dependence of policy on observed
history will shift over time as more is learned
about (or opinions shift about) the structure of
the economy. One could continually reestimate the structure and, each period, reannounce an explicit relation of policy
variables to history.”
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Tom Sargent’s
work on
“The Conquest of
the U.S. Inflation”
•
•
Princeton, 1999
& with Tim Cogley Review of
Economic Dynamics (forth.)
follows this dictum
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e.g., in Cogley and Sargent
3 competing models are
‘continuously reestimated’ and
relative weights assigned for a
(Bayesian) composite model
to ‘explain’ data and
Fed choices...
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but Sims adds:
“However it is simpler to announce the stable
objective function once and then each period
solve only for this period’s policy variables
values instead of computing a complete
policy reaction function. This is done by
making conditional projections from the best
existing reduced form model, and picking the
best looking projected future time path.” (WP
p.24)
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Cogley, Colacito & Sargent (2005)
follows this second dictum
With two models that ‘fit historical data equally well’ (1948-63):
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recognizing what Sims said:
“Empirical macro-economists sometimes
express frustration at the limited amount
of information in economic time series,
and it does not infrequently turn out that
models reflecting rather different
behavioral hypothesis fit the data
equally well.” (p.26)
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In a world that differs from
‘Conquest’ and others
• There is no uncertainty over the specific models, only
about  (the weight on SS)
• Therefore, models are not updated, only  and the
corresponding decision
• Private agents and monetary authority share same
beliefs
• There is no Kydland & Prescott’ time-inconsistency
• Expected inflation in estimations: regressing inflation on ‘a
constant along with one lag of inflation and unemployment’
(so much for Lucas model!)
...in the ‘Days of Samuelson and Solow and Lucas’ (1963?)
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...in the old ‘Days of Samuelson and Solow and Lucas’
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and the ‘old fashioned’, pre VARs OLS,
provides clues,
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More than the Lucas model being in doubt,
the ‘old fashioned’ eclectic-nested model
already ‘hints’ that
“a little of doubt about the Lucas model
is enough to make the central bank acquiesce to
Keynesian prescriptions”
CC&S ‘show’ this beautifully using
Bayesian experimenters and
‘anticipated utility’ policy makers
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“a little of doubt...”
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but the paper is, mostly, about ‘the value
of experimentation’, in a world where...
• The CB must ‘learn the true model’
• Bayesian updating converges to the true
model, whatever this is
• Experimentation is ‘one sided’: either ‘do
nothing’ (Lucas) or move along the ‘Phillips
curve trade-off’ (Samuelson-Solow)
• CB cares a lot about unemployment
• CB experimentation does not “enhance the
difficulty of [private agents] learning by
experience” (M. Friedman, A Program for
Monetary Stability, 1960)
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as a result,
• Experimentation has little value
• Particularly if beliefs about SS are high (natural
experimentation)
• While, if Lucas is right, Keynesian policy makers
discover their mistake quickly
Did they? Was Lucas wrong? Where they too cautious?
SS is right
L is right
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and the paper is also about
‘misspecification and caution’
• Distrusting the ‘prior
over models’ makes a
cautious CB give more
weight to the ‘do
nothing guy’: Lucas
meet the T2 map!
(CC&S +Hansen)
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Distrusting the
‘models specifications’
increases variances
and makes a cautious
CB give more weight
to ‘active policies,’
closer to the SS model
meet the T1 map!
Alas!
Fear + Fear  No Fear
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Are they falling into Sims’ criticism?
“While it ought to appear unreasonable, this pattern of
giving careful attention to minor sources of
uncertainty, while ignoring major sources by making
dogmatic assumptions, is not uncommon in
economics” (‘Pitfalls...’ AER Papers& Proc. 2001)
I do not think so,
I think it is more that, after having gone through the
interesting exercise, one can see that perhaps
‘the Days of Samuelson and Solow and Lucas’
may not be the most interesting models to study
‘Experimentation and Caution in Economics’
And this shows that we have gone a long way...
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In
25 Years, THE VAR
has had
major impact in new generations
as in
and thousands more
But...
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as in 25 Years, THE WALL has
had major impact in new generations too
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end of my discussion!
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