Econ 488: The Advanced Macro Adventure!

Blinder, Alan S. 1994. “On sticky prices: academic theories meet the real world.” In Monetary Policy, ed. N. Gregory Mankiw, 117-154.  Chicago, IL: University of Chicago Press.

Blinder is a bit of a smartass. I don’t mean that as an insult in the slightest, but rather it made his article interesting to read. Here’s a fun quote, while I’m on the topic: “Yes, Virginia, there is an auction-market sector. But it is pretty small.” What is that supposed to mean? I want to move to a less rural state so people don’t automatically assume that I live on the border of WV. I was reading this article in Google Books, and the last part of it wasn’t included in the preview… including the conclusions. Here’s what I have from what I did manage to pillage from the internet:

In this article, Blinder presents empirical research on pricing behaviors of firms. Using the slave-labor that is graduate students, he embarked on a mission to survey 200+ firms on what they take into consideration when to deciding whether or not to adjust their prices to changes in demand or costs, in addition to how often they actually change their prices on behalf of these factors. The majority of firms are willing to adjust their prices 2-3 times per year. Surprisingly, firms respond equally as rapidly to increases and decreases in costs and demand, adjusting their prices on average within 3 months of the shock. The less statistically significant of these is the response to decreases in costs, since most firms are unlikely to be fortunate enough to have decreased costs.

The second part of Blinder’s research deals with testing whether or not specific theories on the behavior of the firm enter into firms’ thought process when deciding whether or not to change their prices. To do this, the researchers paraphrase the general idea of the theories and ask their subjects, on a scale of 1-4, how important the implications of that theory are in their decision making. He decided which theories to use based on their popularity at conferences and within economic literature.

The most important theory relates to oligopolies, where firms are reluctant to be the first to change their prices, and will therefore wait for other firms to change theirs first to avoid losses. Firms are less likely to raise their prices until costs rise, meaning they maximize the returns from an outward shift in demand as much as possible before the rising price of inputs forces them to raise their prices to maintain their profit maximization. The third most important, which is rather frightening to me,  is that firms are more likely to adjust delivery lags, service or product quality in response to a shock. This is where you get things like Toyota using low quality bolts in its cars to cut costs and avoid raising prices (I heard that rumor from a Toyota owner and a car-fiend who apparently has no qualms with lying to me… so I’m not sure of its veracity and don’t have enough interest to find out).

The least influential theories were beliefs that customers judged quality based on price, lags based on bureaucratic influences, and firms’ greater likelihood of adjusting their inventory stocks than their prices. That last one was from Blinder’s 1982 paper, so it must have been rather disappointing to discover that it had minimal significance in the real world. The remainder of the paper has to do with how Blinder manipulated his data in regression analysis. Instead of wading through his thought process, I decided to jump to the conclusion and work my way back… only to discover that Google Books had hidden the conclusion from me. Which made me angry.

I’ll probably revise this later. I’m saying that now because I don’t really want you to remember it. Let’s face it: I’ve said that exact same thing for nearly every post I’ve done. So there it is. Out of the way, and sure to be remembered because of this unnecessary rant.

I’ve read one and a half of the New Keynesian articles in the Reader thus far, but I fully intend to read all of them… I should considering I have to write about the theory. Regardless, Here:

Mankiw, N. Gregory. 1992. “The reincarnation of Keynesian economics.” European Economic Review 36 (April): 559-65.

This very brief, casually written article describes some of the skepticisms that make New Keynesianism so new and fancy. New Keynesians are allowed to maintain ties to Keynes’ theories while scrutinizing them as they do not consider his work to be flawless. New Keynesians do not consider the General Theory to be an economic bible of sorts, but rather a stepping stone that ought to be considered in later theory. It is to be used in conjunction with more classical approaches. NK theorists do not have a consensus on how effective either fiscal or monetary policy are, but they address evidence that fiscal policy is not as overwhelmingly influential as Keynes suggested it was. Given that the General Theory was in response to the Great Depression. Therefore, the specific economic conditions which inspired it make it exceptionally dated in this regard. NKs also consider monetary policy to have a relatively greater impact on the economy. There is not necessarily a trade off between unemployment and inflation in the long run, and in fact most NKs lean toward a LR natural rate hypothesis. However, there may be such a trade off in the short run, just to screw with policy makers. NK theorists are also skeptical about the benefits of discretionary policy, believing it to be an explanation of high inflation rates (ten times what they were when Keynes was around).

I find it hard to analyze this article, since it’s more or less a list of things New Keynesians don’t do. It makes just about as much sense as analyzing a list of groceries that an individual has decided specifically not to buy. The overall impression that I get from them is that in the long run, policy is more or less ineffective and can only be used to mediate crises in the short run. Mankiw doesn’t say this, but it seems that stabilizing peoples’ long run expectations appears to be the prescription of NK theorists. I suppose that may lead to more stability in the short run, since individuals can focus more on mediating short run fluctuations in the economy without worrying about what’s going to happen ten years down the road.

Snowdon, Brian and Howard Vane. 1995. “New Keynesian economics today: The empire strikes back.” American Economist 39 (Spring): 48-65.

Old-school Keynesians brought the “visible hand” that is government into the picture of macroeconomic theory. If that were an actual picture, it would be like taking a utilitarian-looking shadowbox of a factory machine with gears and all that jazz and splattering it with grime and grease paint and permanent ink. Classicals argued that the invisible hand performed magic and equilibrated the economy; Keynesians argued that markets do not self-equilibrate, and therefore the government can be used for that purpose. New Keynesians focus more on assumptions related to overall efficiency as opposed to equilibration. New classicals and cyclists argue that consumers adjust the quantities of items they purchase depending on prices, NK theorists argue that firms adjust their behavior on behalf of demand shocks. New Keynesians also assume imperfect competition and information with variable transaction costs, creating inflexibility in the form of nominal wages and prices and real variables (not specified in this article).

From this point onward, the authors interview Mankiw on his views. While interesting and different from other things I’ve read of his, I don’t feel like writing about them (mostly because I haven’t entirely finished reading that part). The term “Monopolistically competitive” came up in the reading. Any ideas about what that means? Maybe? As of now, my general impression of how NK theorists have impacted macro theory as a whole mirrors how I view Keynes as having effected classical theory. cyclists were trying to make everything seem nice and rational with their silly assumptions… And then the New Keynesians crashed their party with reality (kind of like the way Green Peace throws blood on peoples’ furs, I should imagine).

I’m done.