Friday, October 24, 2008

Edward, You Ignorant Arse

In an email exchange with a graduate student, Edward Prescott proves himself to be an impolite, ignorant, arrogant fool. Prescott's correspondent, Leonid Teytelman, doubted this must be Prescott in full possession of his faculties - maybe an adolescent niece or nephew had somehow gotten ahold of Prescott's account. He could not be drunk, since the interchange took place over several days. Myself, I have no problem in believing that Prescott understands neither the science of economics nor basic facts about the United States economy.

Apparently Prescott, in his professional work with Kyland, is equally incoherent. Jim Hartley documents that
"In five different programmatic manifestos over a span of 15 years, Kydland and Prescott have offered five different—and in many ways mutually incompatible—justifications for the models they were advocating." -- James E. Hartley (2006) "Kyland and Prescott's Nobel Prize: the Methodology of Time Consistency and Real Business Cycle Models", Review of Political Economy, V. 18, N. 1 (January): 1-28
At one point, business cycles are caused by the time-to-build capital equipment. No, they are caused by technology shocks in a growth model. You should believe this because "the smoothed series and the derivations from the smoothed series are quantitatively consistent with the observed behavior". No, only because the model explains co-movements of the deviations. No, because the newly interpreted model follows from "standard" theory (Solow-Swan growth modeling). And deviations from the model are because the measurements are bad. No, the model was built to explain previously observed facts, which are observed not by looking at deviations from the Solow-Swan growth model, but from deviations from the output of the Hodrick-Prescott filter. In particular, the model explains the observed acyclical nature of movements in real wages. That is, the model explains the observed strong procyclical nature of movements in real wages. And the model is merely an application of Computable General Equilibrium modeling. The parameters of the model are based on observed values. No, they are chosen so the model outputs "mimic the world".

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