I have received the second edition of Mishkin´s Macroeconomics – Policy and Practice textbook. Some time ago I did a couple of posts commenting on the first edition (here, here).
In this second edition there are several additions, most notably Mishkin´s introduction of what he calls “A Dynamic Approach to Macroeconomics”. According to Mishkin (page XXXIV):
Analyzing today´s hot-button policy issues requires approaching macroeconomic theory using the models that researchers and policy makers employ. The central modelling element in Macroeconomics: Policy and Practice, Second Edition, is a powerful, dynamic aggregate demand and supply (AD/AS) model that highlights the interaction of inflation and economic activity. In this model, inflation (as opposed to the price level) is plotted on the vertical axis.
In justifying the use of the Dynamic AS/AD (DASAD) model Mishkin says, inter alia, that:
- The DASAD framework focuses on the interaction between inflation and output, which is exactly what the media and policy makers focus on. In contrast, traditional AS/AD analysis focuses on the interaction between the price level and output.
- The DASAD framework characterizes monetary policy easing or tightening as a change in the interest rate, which is exactly the way central banks conduct monetary policy…
What put me off?
His DASAD is only “partly” dynamic because in the horizontal axis you won´t find the rate of real output growth but the deviation of output from ‘potential’ (a ‘mystery’). In that sense the AD curve is not a rectangular hyperbola (see here).
If he had presented the DASAD model that way he could easily characterize monetary policy as providing nominal stability (keep AD growing along a level growth path).
And I really don´t know why he eschewed that route because in his “valedictory remarks” in his last FOMC meeting six years ago (August 5 2008) he was very clear:
What I’d like to spend some time on—because I feel this is sort of my swan song, but maybe because I’m a classy guy, I’ll call this my “valedictory remarks”—are three concerns that I have for this Committee going forward. I’m not going to be able to participate, but I have a chance now to lay them out.
The first is the real danger of focusing too much on the federal funds rate as reflecting the stance of monetary policy. This is very dangerous. I want to talk about that.
My question: Why can´t textbook writers write down what they really believe?
Historinhas 
Mishkin’s textbook is inexplicable in current context. What about ZLB? Japan has had low interest rates for 20 years …what has that got to do with monetary policy? The textbook, as quoted, even
fails to say whether the changes in interest rates are “real” or not, adjusted for inflation. Egads. The most pressing issue today in monetary policy is how to conduct that policy in a ZLB environment.
Benjamin, he goes in detail through the ZLB and all that. I just wanted to highlight his “inconsistency” on interest rates as “stance of MP”.
How does one reconcile the thought of market monetarism as now somewhat “mainstream”, and yet a key concept… temporarily “lost”?
Obviously much has happened since 8/5/08 to quell Mishkin’s fear that “the media and policy makers” would wrongly use rates as a proxy for the stance of policy.
You asked why textbook writers can’t say what they believe. That got me thinking about something
Greg Cochran said awhile back about thick vs. thin problems. Macro presents Thick problems, and my hunch is that Thick problem solving is better accomplished through the mode of blogging- constant iteration, feedback, ferocious immediate destruction of stupid ideas, etc. -, as opposed to textbooks/academia, etc. (Or merely that something like the blogosphere is a necessary compliment to the traditional approach.) Here’s Greg:
http://westhunt.wordpress.com/2012/06/06/thick-and-thin/
——
“There is a spectrum of problem-solving, ranging from, at one extreme, simplicity and clear chains of logical reasoning (sometimes long chains) and, at the other, building a picture by sifting through a vast mass of evidence of varying quality. I will give some examples. Just the other day, when I was conferring, conversing and otherwise hobnobbing with my fellow physicists, I mentioned high-altitude lighting, sprites and elves and blue jets. I said that you could think of a thundercloud as a vertical dipole, with an electric field that decreased as the cube of altitude, while the breakdown voltage varied with air pressure, which declines exponentially with altitude. At which point the prof I was talking to said ” and so the curves must cross!”. That’s how physicists think, and it can be very effective. The amount of information required to solve the problem is not very large. I call this a ‘thin’ problem’.
At the other extreme, consider Darwin gathering and pondering on a vast amount of natural-history information, eventually coming up with natural selection as the explanation. Some of the information in the literature wasn’t correct, and much key information that would have greatly aided his quest, such as basic genetics, was still unknown. That didn’t stop him, anymore than not knowing the cause of continental drift stopped Wegener.”
—–
Whereas thin fields work well w/ traditional academic approach, because there’s a body of solid truth and ways of thinking about things, and so flexible updating of info is not important, the opposite is true in econ (macro at least).
It seems a crucial ingredient missing in academia, but that’s present in the blogosphere, is the certainty and speed w/ which crucial bits of info will be shoved in your face if you ignore them. You can’t ignore unpleasant facts here.
I’m also reminded of Milton Friedman’s Chicago meetings, wherein some presenters paper would be distributed in advanced, he’d present, and then argumentative chaos would ensue–was encouraged. Like the blogosphere in person.
Anyway, what else can you say when the events of 2008-2014 lead Mishkin to weaken the monetary section of his textbook?
Brendan, very interesting comment.
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