Friday, June 12, 2009

Poor macroeconomics of money market freezes

There are plenty of papers attempting to analyze the current crisis. For proper modeling, I would claim that a model would need the following ingredients, at least: some sort of shock (or we would remain in steady state), agents forming expectations (as the evaluation of future prospects impacts current decisions), intertemporal substitution (as savings and investment are crucial to the current problem), some market imperfection (or there would no problem to take care of), general equilibrium effects (to take into account the impact on prices). In other words, you need some proper dynamics so that a crisis can be generated and policies scenarios can be over the following periods.

Max Bruche and Javier Suarez build a model with no dynamics whatsoever. Sure, there are two periods, but households save in the first to consume in the second, and care only about the second period. So it is really a static model as households face no intertemporal decision. Same for firms, that just take a loan and then produce. What is the alternative? And what to do once a "bad equilibrium" happens? The economy is already over.

Bad papers happen, and they disappear in drawers. But this one is slated to appear in the Carnegie Rochester Conference Series, now part of the Journal of Monetary Economics. This used to be a prime outlet, where papers like the Lucas Critique or the Taylor Rule were published. What a disappointment.


Vilfredo said...

I noticed this paper, too. I could not believe that a crisis was considered to be a static phenomenon.

Kansan said...

Make a model static in the name of tractability, sad.