Must-Read: Robert Solow: On the Irrelevance of the Ramsey Model
Must-Read: Given the extraordinary number of potentially macro economically significant market failures for which there is evidence–both casual-observational and statistical–why would anyone ever have imagined that taking the representative-agent Ramsey model and adding one (or two, or three) frictions would not produce a degenerate research program?
: On the Irrelevance of the Ramsey Model: “Research focuses on the implications of wage and price stickiness, gaps and…
…asymmetries of information, long-term contracts, imperfect competition, search, bargaining and other forms of strategic behavior, and so on…. This diversity only intensifies my uncomfortable feeling that something is being put over on us, by ourselves. Why do so many of those research papers begin with a bow to the Ramsey model and cling to the basic outline?… Attaching a realistic or behavioral deviation to the Ramsey model does not confer microfoundational legitimacy on the combination. Quite the contrary: a story loses legitimacy and credibility when it is spliced to a simple, extreme, and on the face of it, irrelevant special case…. It could… be true that the bow to the Ramsey model is… a harmless way of providing some apparent intellectual unity…. That seems hardly worthy of grown-ups, especially because there is always a danger that some of the in-group come to believe the slogans, and it distorts their work…. The theory is neat, learnable, not terribly difficult, but just technical enough to feel like ‘science.’