The Agrarian Revolt

Roger Farmer used to have a blogging style that was a bit...abstruse.

Well, no more.

Here is Farmer on the "All models are wrong" dodge:

I have lost count of the number of times I have heard students and faculty repeat the idea in seminars, that “all models are wrong”. This aphorism, attributed to George Box,  is the battle cry  of the Minnesota calibrator... 

Of course all models are wrong. That is trivially true: it is the definition of a model. But the cry  has been used for three decades to poke fun at attempts to use serious econometric methods to analyze time series data.

For good measure, he includes the following picture, which I am just going to steal because it's so awesome:

And here is Farmer on the Real Business Cyclists:

Time series methods were inconvenient to the nascent Real Business Cycle Program that Ed pioneered because the models that he favored were, and still are, overwhelmingly rejected by the facts. That is inconvenient. 

Ed’s response was pure genius. If the model and the data are in conflict, the data must be wrong...His response was not only to reformulate the theory, but also to reformulate the way in which that theory was to be judged. In a puff of calibrator’s smoke, the history of time series econometrics was relegated to the dustbin of history...

And here is Farmer on the H-P Filter:

How did Ed achieve this remarkable feat of prestidigitation? First, he argued that we should focus on a small subset of the properties of the data... 

Ed argued that the trends  in time series are a nuisance if we are interested in understanding business cycles... 

After removing trends, Ed was left with the wiggles. He proposed that we should evaluate our economic theories of business cycles by how well they explain co-movements among the wiggles. When his theory failed to clear the 8ft hurdle of the Olympic high jump, he lowered the bar to 5ft and persuaded us all that leaping over this high school bar was a success.

And here is Farmer on the whole dang post-RBC trend-and-cycle macro paradigm:

By accepting the neo-classical synthesis, Keynesian economists had agreed to play by real business cycle rules. They both accepted that the economy is a self-stabilizing system that, left to itself, would gravitate back to the unique natural rate of unemployment. And for this reason, the Keynesians agreed to play by Ed’s rules. They filtered the data and set the bar at the high school level. 

We don't have to play by Ed's rules. We can use the methods developed by Rob Engle and Clive Granger as I have done here. Once we allow aggregate demand to influence permanently the unemployment rate, the data do not look kindly on either real business cycle models or on the new-Keynesian approach. It's time to get serious about macroeconomic science and put back the Olympic bar.

Dang, Farmer is breathing fire!! This brings me back to the good ol' days of 2011, when the Macro Wars raged in blog-land...



Anyway, Farmer seems totally right about the arbitrariness of the H-P filter and the very very very low height of the empirical hurdle represented by calibration + moment-matching.

It's also very interesting to see someone finally standing up for the idea of non-self-correcting recessions. The whole idea that "trend" and "cycle" are totally independent phenomena always seemed kind of bogus to me, especially in light of evidence like the Mankiw & Campbell "unit root in GDP" paper.

But here's the really cool thing about Farmer's attack on standard macro: it's coming from a real live macroeconomist. Most macro-bloggers I know of are either outsiders (Krugman, DeLong, etc.) or insiders who defend the dominant paradigm (Williamson, House, Wren-Lewis sort of), or nice folks who don't generally get in blogfights (Kimball). It's highly unusual to see a high-level, respected business cycle theorist come out swinging against the conventional macro wisdom.

Anyway, I'll be excited to see who responds!