Tag Archives: counterfactuals

Taylor, Models, and Stimulus

Throughout the current recession, John Taylor has exemplified what an economist should be. He continuously provides careful and thoughtful commentary on the financial crisis and the recession — both in scholarly papers and on his blog. Taylor’s recent post on the stimulus package highlights precisely what I am talking about.

In late November the NYT had a piece on the stimulus package which showed that certain forecasts of GDP were shown to be much higher with the stimulus package than those forecasts would have been without the stimulus package. However, Taylor reminds us of an important point:

It’s been nearly a year since the stimulus package of 2009 was passed. Unfortunately most attempts to answer the question “What was the size of the impact?” are still based on economic models in which the answer is built-in, and was built-in well before the stimulus. Frequently the same economic models that said, a year ago, the impact would be large are now trotted out to show that the impact is large. In other words these assessments are not based on the actual experience with the stimulus. I think this has confused public discourse.

I would take this criticism one step further. As I have mentioned before, there are major fundamental differences between the New Keynesian and Old Keynesian models. What’s more, our priors should be based on the model that we believe to be the best description of reality and subsequently adjusted accordingly. While there is certainly much to quarrel with in New Keynesian models, I find it difficult to believe that we should elevate the Old Keynesian models in light of these potential shortcomings.