Why RBC models can’t be taken seriously as a guide to policy

18 September, 2012 at 09:53 | Posted in Economics | 2 Comments

James Tobin explained why already thirty years ago:

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

Arjo Klamer, The New Classical Mcroeconomics: Conversations with the New Classical Economists and their  Opponents,Wheatsheaf Books, 1984

Rigorous models lacking relevance is not to be taken seriously. I would rather be vaguely right, than precisely wrong - as Keynes once put it.

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2 Comments »

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  1. Prof. Syll,
    What theories/models of the trade cycle do you believe to be the most relevant? I, myself, think that Minsky’s thesis in ‘John Maynard Keynes’ is right: there are mild cyclical fluctuations that are described by the consumption-function models and are attributed to some market discoordination, perhaps inventory build-up, and there are big booms/busts that he describes with FIH. But then again, I am an amateur, not a professional economist.

    • That’s as good as it gets. A superb book still well worth reading for understanding trade cycles (but on the other hand I might be biased since I had Minsky as teacher …)


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