Nobel economics prize winners aren't anti-Keynesian

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    Oct 17, 2011 11:14 PM GMT
    So much for WSJ op-ed writers. Sims doesn’t want to be pigeonholed. “I’m not ‘non-Keynesian,’ ” he said, adding that he has been an active “promoter of new Keynesian macroeconomic models,” because they “are the place in our profession where theory and data and policy decision-making are coming together.”

    “It doesn’t really make much sense to stand on the sidelines and take potshots at them,” he said. “If you don’t like the way they’re working, you should try to do better.”

    He and Professor Sargent have been “trying to do empirical macroeconomics using formal tools of statistics,” he said. “Those tools aren’t in themselves ideological.”

    Professor Sims spoke favorably of the Obama administration’s fiscal stimulus programs, which are Keynesian in their countercyclical spending. “An expansionary fiscal policy is probably what we need right now,” he said.

    But he criticized traditional Keynesian thought for inadequacy in “the temporal dimension,” meaning that it didn’t focus on the consequences of running long-term deficits. “The implications of that for future stringency are very important,” he said. “Our current policy debates just aren’t doing it.”

    President Obama deserves praise for offering a “grand compromise” — including spending cuts and tax increases — to resolve the long-term deficit, Professor Sims said. He criticized the Republican Congressional leadership for ruling out tax increases, which, he said, most economists know are needed. And he generally approves of the accommodative monetary policies of the Federal Reserve, led by his fellow Princetonian, Ben. S. Bernanke, whom he described as a “new Keynesian.”

    I asked whether there is a sense in which this is a “non-Keynesian” Nobel.

    Yes, he said, but mainly in a historical sense that is already outdated.
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    Oct 17, 2011 11:15 PM GMT readers wanted to know about how the Sims/Sargent methodology plays into Keynesian or IS-LM-type models. Does it support them? Well, yes, but the case needs a bit of explaining.
    So the point is that this sort of technique — and technique is what the Nobel was for — is consistent with and in fact broadly supportive of the kind of model the Romers, Brad DeLong, and yours truly among others think is the right way to think about the mess we’re in.