Saturday, December 19, 2009

Those Darn Microeconomists!

Nick Rowe complains about microeconomists and their apparent inability to grasp macreconomics.

I wrote about the subject some months ago. If wages are stickier than product prices, then it is possible that the unemployment associated with "tight money" will be associated with high real wages. But high real wages aren't really the problem. The problem is that the real quantity of money is less than the real amount demanded at a level of real income equal to the productive capacity of the economy.

On the other hand, recent discussions of the macreconomic impact of the minimum wage has suggested that many macroeconomists can't get beyond thinking of a model where there is "the" wage rate.

I have similarly been troubled by discussion of the liquidity trap and the zero nominal bound. While the interest rates the Fed has traditionally sought to manipulate are near zero, most interest rates aren't anywhere near zero. To what degree is the problem that macroeconomists have models that include "the" interest rate.

1 comment:

  1. Bill,

    I find discussion of "the" interest rate as misguided as well. There is a multitude of empirical evidence that fails to identify a statistically (or economically) significant impact of "the" interest rate on investment -- fixed capital or inventory.

    Brunner and Meltzer wrote an excellent paper in 1968 (1968!) in which they provided a serious analysis of the liquidity trap with more than just two assets. The fact remains that money is not a (near) perfect substitute for all other assets even if it is for short term bonds.