I'm not a macro guy but seems to me Glasner got it all wrong here:
https://uneasymoney.com/2016/10/06/rational-expectations-or-the-road-to-incoherence/#comments
What you guys think?
Glasner on RE and shocks
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I stopped reading at this:
For an intertemporal equilibrium to exist, there must be a complete set of markets for all future periods and contingent states of the world, or, alternatively, there must be correct expectations shared by all agents about all future prices and the probability that each contingent future state of the world will be realized.
Provided, the terminology and language conventions we use in economics are not the best if we want to engage in dialogue with people from other disciplines (few non-economists understand our notion of equilibrium, particularly physicists who mistake it for steady state). However this guy is completely igorant and mixing a ton of concepts (rational expectations = complete markets in his view).
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If we don't agree on a probability measure over future states/prices, how do we have complete markets or efficient trade? If my beliefs differ from yours, trade reveals information to us both that undermines the possibility of trade. See Glosten-Milgrom, Milgrom-Stokey, Marek-Weretka, I mean, even the rational exp stuff about getting informed by Grossman and.... I forget. That's seminal, important stuff, and the bit you posted hits the nail on the head.
I stopped reading at this:
For an intertemporal equilibrium to exist, there must be a complete set of markets for all future periods and contingent states of the world, or, alternatively, there must be correct expectations shared by all agents about all future prices and the probability that each contingent future state of the world will be realized.
Provided, the terminology and language conventions we use in economics are not the best if we want to engage in dialogue with people from other disciplines (few non-economists understand our notion of equilibrium, particularly physicists who mistake it for steady state). However this guy is completely igorant and mixing a ton of concepts (rational expectations = complete markets in his view). -
The road that turned out to be a blind alley
Comment on David Glasner on ‘Rational Expectations, or, The Road to Incoherence’
A paradigm is defined by its axioms. Orthodox economics is built upon this set of foundational hard core propositions: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985)
The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the neo-Walrasian hard core contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).
Nowadays, all scientists agree that angels, phlogiston, epicycles, superman, and the Easter Bunny are nonentities. As far as economics is concerned we can agree that utility, constrained optimization, intertemporal optimization, rational expectation, well-behaved production functions or supply-demand-equilibrium are nonentities just like the Easter Bunny. Every model that contains a nonentity is A PRIORI false. In practical terms: as soon a the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the waste basket. The same holds for all other nonentities.
The discussion of models that contain nonentities is vacuous. Nick Rowe, J. W. Mason and David Glasner resemble medieval witch hunters who exchange their opinions about the difference between incubus and succubus.
Rethinking economics means to discard the failed paradigms and to fully replace Walrasian microfoundations and Keynes’s flawed macrofoundations by something new which has to be entirely FREE of nonentities. As Romer has recognized, with DSGE economics has hit the wall at the end of the blind alley.
Egmont Kakarot-Handtke -
Unlearningecon
October 7, 2016 at 1:30 pm
This is a great post as always, David.There are a couple of similar issues that have always bothered me about macro models. I am entirely willing to admit that these may just be my misunderstandings and am happy to be corrected. As Greg has pointed out, this stuff is just confusing.
– When you solve the transition path of a macro model after a shock, it is in steady state equilibrium at every point in the transition. So when does the adjustment actually take place?
– You solve a model before a shock, which gives you the (steady state) maximisers of an infinite summation. Then after some t<inf, there is a shock. You now solve the model from 0 to infinity after the shock. But shouldn't we be looking at what happens at time t, given that the model has been 'running' for t periods prior to the shock? Would the relevant variables necessarily be at their steady state values values at time t? Does solving from 0 to infinity both times and speaking of the 'transition' between them really make sense?