A First Meeting of Old and New Keynesian Econometric Models

Lawrence Klein who died last October at age 93 is most remembered for the “creation of econometric models and the application to the analysis of economic fluctuations and economic policies” as the Nobel Prize committee put it in the 1980 citation.  But in these days of “macroeconomists at war” it is worth remembering that Klein was also a pioneer in exploring the reasons for differences between macro models and the views of the economists who build and estimate them.  The Model Comparison Seminar that he ran during the 1970s and 1980s brought macroeconomists and their models together—macroeconomists at peace?—to understand why their estimates of the impact of fiscal and monetary policy were different.   In my view there is too little of that today.

I will always be grateful to Lawrence Klein for inviting me to join his Model Comparison Seminar and enter into the mix a new kind of model with rational expectations and sticky prices which we were developing at Stanford in the mid-1980s.  The model was an estimated version of what would come to be called a “new Keynesian” model, and the other models in the comparison would thus logically be called “old Keynesian.” They included such famous workhorse models as the Data Resources Incorporated (DRI) model, the Federal Reserve Board’s model, the Wharton Econometric Forecasting Associates (WEFA) model, and Larry Meyer’s Macro Advisers model.  It was probably the first systematic comparison of old and new Keynesian models and was an invaluable opportunity for someone developing a new and untried model.

The performance comparison results were eventually collected and published in a book, Comparative Performance of U.S. Econometric Models. In the opening chapter Klein reviewed the comparative performance of the models, noting differences and similarities: “The multipliers from John Taylor’s model…are, in some cases, different from the general tendency of other models in the comparison, but not in all cases….Fiscal multipliers in his type of model appear to peak quickly and fade back toward zero. Most models have tended to underestimate the amplitude of induced price changes, while Taylor’s model shows more proneness toward inflationary movement in experiments where there is a stimulus to the economy.”

Klein was thus shedding light in why government purchases multipliers were so different—a controversial policy issue that is still of great interest to economists and policy makers as they evaluate the stimulus packages of 2008 and 2009 and other recent policies as in the paper “New Keynesian versus Old Keynesian Government Spending Multipliers,” by John Cogan, Tobias Cwik, Volker Wieland and me.

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