ECONOMETRICS AND REALITY

Starting with a realist ontology the economic methodologist, Tony Lawson, argues that econometrics is a failed project. Apparently more sympathetic to econometrics, the philosopher of science, Nancy Cartwright, again from a realist perspective, nonetheless argues for conditions of applicability that are so stringent that she must seriously doubt the usefulness of econometrics. In this paper, I reconsider Lawson''s and Cartwright''s analyses and argue that realism supports rather than undermines econometrics properly interpreted and executed.

A NeoWicksellian in a New Classical World: The Methodology of Michael Woodford’s Interest and Prices

Woodford’s Interest and Prices is considered from a methodological point of view. While innovative as a work of macroeconomic theory, it is decidedly in the mainstream methodologically. As such, it provides a good example of the methodological puzzles posed by modern macroeconomics: first, the notion that representative-agent models (or models with very constrained sorts of heterogeneous agents) provide genuine microfoundations; second, the idea that Paretian welfare economics in the context of such models gives any useful policy guidance.woodford, neowicksellian, classical

Dr. Keynes: Economic Theory in a Diagnostic Science

In his own view, economic theory was important to Keynes’s work as an economists. Aside from the General Theory, most of his economic writings, however policy oriented make explicit reference to theory. Nevertheless, Keynes’s theoretical style is so far from what contemporary economics regards as “theory” that some have dismissed Keynes as a theorist altogether or thought of him as a theorist hampered by the lack of modern mathematical tools. In this paper, I argue to the contrary that Keynes’s theoretical style is conditioned by a conception of theory as a diagnostic tool. This is a natural development from Marshall, and conceptually very different from modern macroeconomists. It is nonetheless a very attractive conception of the place of theory in economics.general theory, economics, contemporary

Theoretical issues of liquidity effects: commentary

Liquidity (Economics)

Searching for the Causal Structure of a Vector Autoregression

Vector autoregressions (VARs) are economically interpretable only when identified by being transformed into a structural form (the SVAR) in which the contemporaneous variables stand in a well-defined causal order. These identifying transformations are not unique. It is widely believed that practitioners must choose among them using a priori theory or other criteria not rooted in the data under analysis. We show how to apply graph-theoretic methods of searching for causal structure based on relations of conditional independence to select among the possible causal orders – or at least to reduce the admissible causal orders to a narrow equivalence class. The graph-theoretic approaches were developed by computer scientists and philosophers (Pearl, Glymour, Spirtes among others) and applied to cross-sectional data. We provide an accessible introduction to this work. Then building on the work of Swanson and Granger (1997), we show how to apply it to searching for the causal order of an SVAR. We present simulation results to show how the efficacy of the search method algorithm varies with signal strength for realistic sample lengths. Our findings suggest that graph-theoretic methods may prove to be a useful tool in the analysis of SVARs.search, causality, structural vector autoregression, graph theory, common cause, causal Markov condition, Wold causal order, identification; PC algorithm

Truth and Robustness in Cross-country Growth Regressions

The work of Levine and Renelt (1992) and Sala-i-Martin (1997a, b) which attempted to test the robustness of various determinants of growth rates of per capita GDP among countries using two variants of Edward Leamerâ??s extreme-bounds analysis is reexamined. In a realistic Monte Carlo experiment in which the universe of potential determinants is drawn from those in Levine and Reneltâ??s study, both versions of the extreme-bounds analysis are evaluated for their ability to recover the true specification. Levine and Reneltâ??s method is shown to have low size and extremely low power: nothing is robust; while Sala-i-Martinâ??s method is shown to have high size and high power: it is undiscriminating. Both methods are compared to a cross-sectional version of the generalto-specific search methodology associated with the LSE approach to econometrics. It is shown to have size near nominal size and high power. Sala-i-Martinâ??s method and the general-to-specific method are then applied to the actual data from the original two studies. The results are consistent with the Monte Carlo results and are suggestive that the factors that most affect differences of growth rates are ones that are beyond the control of policymakers.growth, cross-country growth regressions, extreme-bounds analysis, general-to-specific specification search

Measuring Systematic Monetary Policy

The 1970s and early 1980s witnessed two main approaches to the analysis of monetary policy. The first is the early new classical approach of Lucas, based on the assumptions of rational expectations and market clearing. The second is the a theoretical econometrics of Simsâ??s VAR program. Both have developed: the new classical approach has been enriched through various accounts of price stickiness, cost of adjustment or alternative expectational schemes; the original VAR program has developed into the structural VAR program. This paper clarifies the relationship between these two programs. Based on work of Cochrane (1998), it shows that the typical method of evaluating unanticipated, unsystematic monetary policy is correct only if the conditions necessary for Lucasâ??s policy-ineffectiveness proposition hold, while recent methods for evaluating systematic monetary policy violate Lucasâ??s policy-noninvariance proposition (â??the Lucas critiqueâ??). The paper shows how to construct and estimate (using regime changes) a model in which some agents form rational-expectations and others follow rules of thumb. In such a model, monetary policy actions can be validly decomposed into systematic and unsystematic components and valid counterfactual experiments on alternative systematic monetary-policy rules can be evaluated.

Measuring Systematic Monetary Policy

The 1970s and early 1980s witnessed two main approaches to the analysis of monetary policy. The first is the early new classical approach of Lucas, based on the assumptions of rational expectations and market clearing. The second is the atheoretical econometrics of Sims’s VAR program. Both have developed: the new classical approach has been enriched through various accounts of price stickiness, cost of adjustment or alternative expectational schemes; the original VAR program has developed into the structural VAR program. This paper clarifies the relationship between these two programs. Based on work of Cochrane (1998), it shows that the typical method of evaluating unanticipated, unsystematic monetary policy is correct only if the conditions necessary for Lucas’s policy-ineffectiveness proposition hold, while recent methods for evaluating systematic monetary policy violate Lucas’s policy-noninvariance proposition (“the Lucas critique”). The paper shows how to construct and estimate (using regime changes) a model in which some agents form rational-expectations and others follow rules of thumb. In such a model, monetary policy actions can be validly decomposed into systematic and unsystematic components and valid counterfactual experiments on alternative systematic monetary-policy rules can be evaluated.monetary policy

Measuring systematic monetary policy

Monetary policy

Monetary and fiscal impacts on exchange rates

Foreign exchange rates ; Fiscal policy ; Monetary policy ; Budget deficits ; Dollar, American