Yesterday, when one of my friends asked me about the difference between vertical AS curve in classical model and the incline AS curve in Keynesian model, I was puzzled for a while because I was not sure that my answer of neutrality of money in classical model could make an accurate reply. I turned to the textbook of Advanced Macroeconomics of David Romer for a few related chapters and closed the book with slight dissatisfaction. What a big disappointment! With years of study of economics, I even can not answer the primary fundamental issues accurately and immediately. Thus humiliation incentivizes me to write whatever ideas I have when reading papers and books in the coming years of academics.
The first interesting paper I read today is about government spending multiplier in new and old Keynesian model, wrote by Prof. John Taylor and other bunch of macroeconomists in Stanford and Germany, released last week in the website of NBER. In this paper, authors use a new empirical method to show that the current model to evaluate the fiscal policy stimulus proposal is not robust, and the government expending multiplier in wide-cited new Keynesian model is only one-sixth large of old Keynesian model. The conclusion is that the stimulus plan by President Barack Obama may not as efficient as expected. This paper is a response to Christina Romer and Jared Bernstein earlier this year, who wrote a try to persuade the Congress vote the legislation of the stimulus plan. Taylor etc. got the opposite result as what Romer-Bernstein got in the estimating efficiency of fiscal stimulus. I think Prof Taylor is right. I am always a fan of Prof Taylor. He wrote a perfect paper (Taylor, 2008) about the monetary policy and the financial crisis last year, which is the best article about the current crisis from the opinion of Steven Cheung. I think this 2009 paper also provides a good approach for the Chinese government to reconsider about the stimulus plan, which declared by the Premier Wen Jiabao to guarantee an 8% economic growth this year.
Another paper I read today is written by Prof Michael Woodford published in the first volume of AEJ Macroeconomics this January. Prof Woodford is one of the leading macroeconomist in nowadays, with a reputation of precognition of the macroeconomic research. He is undoubted a master of macroeconomics. Beside rigorous academic papers, Prof Woodford also wrote a lot of moderate economics paper for the general interest from an academic approach, but not the same as what Prof Krugman did as a columnism economists. In this paper, Prof Woodford illustrates the convergence of macroeconomics from both general theoretical foundation and econometrical methodology. Compared to the 1980s, there are more consensuses in macroeconomics in nowadays. This paper is a kind of continuation of Prof Woodford’s 1999 paper about the revolution and evolution of macroeconomics. Prof Woodford enumerates five synthesis of contemporary macroeconomics:
1. With the foundation of intertemporal general equilibrium.
2. Econometrically validated structural model for quantitative policy analysis.
3. Endogenous expectation
4. The importance of real disturb in economic fluctuation.
5. The efficiency of monetary policy in inflation target.
In the second part, Prof Woodford criticizes Mankiw’s (2006) debating to find the balance between the role of scientist and engineer for macroeconomist. I think Prof Woodford makes his point clearly and insightfully. But personally, I think not all the sophisticate macro models get the deserve application for the proceeding of policy making by the central bankers and think tank. Prof Woodford gives us lots of different model from the central bank and Federal Reserve Broad in U.S., Europe and other countries such as FRB/US, IMF’s Global Economy Model, etc. I think is will be interesting for us to ask where the Model of Sinica is. It makes me puzzled when I was thinking about how the government and central bank of China to make economic policy. Personally, I think the economic research in China can not sustain, explain and tutor the Chinese economy. Otherwise, China can not lose tens of billions dollar in the oversea investment last year in the financial collapse. That is where we can make an effort. The plan for the remaining days of spring break is to read some papers in GARCH model and Interest and Price (Woodford, 2003).
Reference
Cogan, John, Tobias Cwik, John Taylor and Volker Wieland, “New Keynesian versus Old Keynesian Government Spending Multipliers”,[ NBER working paper # 14782, Feb 28, 2009][Downloade]
Romer, Christina and Jared Bernstein (2009), “The Job Impact of the American Recovery and Reinvestment Plan.” January 8, 2009.
Taylor, John (2008) “The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong”, Written version of keynote at Bank of Canada, November 2008 [Downloade]
Woodford, Michael (1999), “Revolution and Evolution in Twentieth-Century Macroeconomics,” June 1999. (pdf format) [Presented at a conference, Frontiers of the Mind in the Twenty-First Century, U.S. Library of Congress, Washington, D.C., June 1999.][Downloade]
__(2003) Interest and prices: Foundation of a theory of monetary policy, Princeton University Press, Princeton, New Jersey., 2003.
__ (2009), “Convergence in Macroeconomics: Elements of the New Synthesis, American Economic Journal: Macroeconomics, Vol. 1, No. 1, 267-279.[Downloade]
