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Wednesday, April 18, 2012

On Noah Smith contra The equilibrium

Not just multiple, there can be a continuum of equilibria and sunspots can matter.

I think the key point of this excellent post is that you note that eg Lucas assume that, in the long run, the economy must go to a unique equilibriumevance (ok be stationary around it). This is just assumed with no motivation. The policy irrelevance ( or with frictions near irrelevance) result is not a result but a methodological a priori.

Note this can't be true if there is endogenous growth (I think my student Alessandra Pelloni may have been the first to note this in the literature). Some rarios might be stable, but GDP isn't. Note that when he decided to
work on endogenous growth, Lucas ceased to discuss learning dynamics at all. Maybe because rational expectations had become the orthodoxy or maybe because he knew that assuming no need for learning matters in that new context. By the way, I keep trying to interest people in a paper on how learning vs magically knowing the joint probability distrubution of everything must make a permanent difference if there is hysteresis (as in all endogenous groth models). I can't tell if the point is too obvious or not obvious enough. Also I can never tell how many times something has been noted in the literature.

This is all off topic. On topic comment later.

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