Tuesday Around the Internet: Robert Waldmann on John Quiggin on Old Old, Old New, New Old, and New New Keynesianism (January 28, 2014)
Robert Waldmann: Angry Bear » John Quiggin is, as usual, Brilliant: "John Quiggin provides an excellent discussion of macroeconomics. It is much too good to summarize. Just click the link and read.... [But] I can think of a few things to add:
The claim that medium and long run outcomes are determined by tastes and technology does not imply that there is a unique long run equilibrium growth path.... It is standard in business cycle theory to assume that technological progress is exogenous, but really believing that it is exogenous is much crazier than believing in rational expectations and such....
There was a rather large literature on coordination failures which cause fluctuations (you know Benhabib and Farmer and such like). There was nothing wrong with this literature as math or fun theory. It seems to have vanished....
Actual general equilibrium theory did not stagnate from 1950 on. Actual general equilibrium theorists studied models with incomplete markets in which equilibria can be indeterminate, sunspots can affect outcomes and equilibria are generically not constrained Pareto efficient.
Persistent fluctuations do to aggregate demand were renamed “hysteresis” by Blanchard and Summers in 1986. European data already massively rejected the not-yet developed old-new-Keynesian models. This paper was considered to be relevant to a relatively minor field (the study of strange countries which aren’t the USA) and ignored in mainstream macroeconomics (eg by Blanchard and Quah in 1987). The study of the strange unusual case of developed countries other than the USA didn’t even remain central to the modeling of European macroeconomies by European central banks.
All four points imply that the very widespread conviction among macroeconomists that long run outcomes are unique and determined by exogenous variables had no basis in theory.... The assumption of a unique exogenous long run growth path absolutely does not follow from the D, S, G or E parts of DSGE. It is a separate assumption...