The Chimera of Macroeconomics

  Some macroeconomists differentiate themselves with the name “ new Keynesian ” from other macroeconomists. Most typically they imagine the so-called “sticky price model of AS-AD” for the medium run, which must fall between the short and long runs. Their Sophistic Way. The model is often described with the following equation: P= s∙ EP + (1– s)∙[P+ a ∙ (Y– Y*)] , where EP is the expected price level (“sticky prices”), “ s ” the fraction of firms stuck to EP , Y* the natural level of output, and “ a ” a positive coefficient. Procrustean Bed . See We Told You So: P= [a ∙ (1– s)/ s]Y + [EP– a ∙ (1– s) ∙ Y*/s] . The AS curve is upward sloping!              Wonderful, but for reminding us of the super “classical” Greek mythology: Tailor, and that Swift, the customer’s feet to the bed! A Greek Equation . To emulate Eugene Fama , a Chicago boy, “No similarity is completely similar.” The SPM (for sticky price model) and the PB...

  John M. Keynes illustrates the “liquidity preference” function: M= L(r) (1936, p. 168). Next year, John R. Hicks in “interpretation of Mr. Keynes” comes up with the money demand “equation of Cambridge Quantity”: M= k ∙ P ∙ Y .              To be fair, they like us “demand” money to spend in the near future primarily because “Money is useless until we get rid of it” (Paul Samuelson and William Nordhaus, Economics , 2010, p.458); such getting rid of can never be “now or in the past.” On the other hand, both the interest rate and GDP are already given from outside (read: already determined ).              In mathematics jargon, the interest rate and GDP are a parameter as opposed to a variable. By definition, the parameter is exogenous, while the variable is supposed to be determined in, or “exogenous” of, the market. Wait, a mathematical parameter does not...