Afternoon Must-Read: Paul Krugman: Fighting the Last Macro War?

Paul Krugman: Fighting the Last Macro War?: “Noah Smith… argues that macroeconomic theorists have been like French generals, always preparing to fight the last war….

First of all, a large part of academic macroeconomics is dominated by real business cycle theorists… still about the stagflation of the 1970s, which is at least two wars back…. Second… what were the macro wars? First there was stagflation… the freshwater guys… stopped there… forever living in 1979…. They never reacted at all to the… disinflation of the 1980s… very costly…. This reality, as much as clever new models, drove the Keynesian revival; the RBC guys paid no attention, and learned nothing…. Keynesians spent a lot of time thereafter focused on price stickiness…. Did this leave them unprepared for the next war? A bit, but actually not so much…. Bank runs have been pretty well understood for a long time…. And policy responded pretty effectively…. Dealing with a persistently depressed economy, with monetary policy constrained by the zero lower bound…. The models rolled out… the predictions… made, about interest rates, inflation, the output effects of fiscal policy, were both counterintuitive to many people and reasonably on target. I just don’t see this as a story of economists unprepared to deal with new events….