Subject: Taylor: I put a dress and lipstick on Zandi and made him my prison girlfriend
Posted by: tante on Thu Jul 29 2010 12:34:04 PM
Message:
Yesterday the New York Times published an article about
simulations of the effects of fiscal stimulus packages and financial
interventions using an old Keynesian model. The simulations were
reported in an unpublished working paper by Alan Blinder and Mark
Zandi. I offered a short quote for the article saying simply that the
reported results were completely different from my own empirical work
on the policy responses to the crisis.
I have now had a chance to read the paper and have more to say.
First, I do not think the paper tells us anything about the impact of
these policies. It simply runs the policies through a model (Zandi’s
model) and reports what the model says would happen. It does not look
at what actually happened, and it does not look at other models, only
Zandi’s own model. I have explained the defects with this type of
exercise many times, most recently in testimony at a July 1, 2010
House Budget Committee hearing where Zandi also appeared. I showed
that the results are entirely dependent on the model: old Keynesian
models (such as Zandi’s model) show large effects and new Keynesian
models show small effects. So there is nothing new in the fiscal
stimulus part of this paper.
Second, I looked at how they assessed the impact of the financial
market interventions. Again they do not directly assess the
interventions. They just simulate the model with and without the
interventions. They say that they have equations in the model which
include the financial interventions as variables, but they do not
report the size or significance of the coefficients or how they
obtained them.
Third, the working paper makes no mention of previously published
papers in the literature which get different results. It is rather
standard in research to provide a literature review and to explain why
the results are different from previous published papers. For the
record there are different results in papers by John Cogan, Volcker
Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and
Control, by John Williams and me in the American Economic Journal;
Macroeconomics, or by me published by the Bank of Canada or the St.
Louis Fed
Finally, when I read the paper I discovered in an appendix that
Blinder and Zandi find that policy was not as good as the model shows
and was in fact quite poor when one does a more comprehensive
evaluation. They say in Appendix A that “Poor policymaking prior to
TARP helped turn a serious but seemingly controllable financial crisis
into an out-of-control panic. Policymakers’ uneven treatment of
troubled institutions (e.g., saving Bear Stearns but letting Lehman
fail) created confusion about the rules of the game and uncertainty
among shareholders, who dumped their stock, and creditors, who
demanded more collateral to provide liquidity to financial
institutions.” I completely agree with this statement, but how can one
then argue that policy intervnetions worked, when, in fact, viewed in
their entirety they caused the problem?
Current Thread:
Taylor: I put a dress and lipstick on Zandi and made him my prison girlfriend -- tanteThu Jul 29 2010 12:34:04 PM
