The Confused and the Confusing

I don't know why, but I find Paul Krugman's behavior interesting. Here's his reply to my previous post. This is typically the way he does it. For some reason Noah Smith is always the conduit.

The first thing to note is this:

For newbies: saltwater is the kind of macro practiced at MIT, some of Harvard, Princeton, etc., macro that still finds Keynesian ideas useful and argues that monetary and fiscal policy can be effective; freshwater is Chicago, Minnesota, etc. insisting that business cycles are optimal responses to real shocks.

This is not actually a message for newbies. Krugman seems to be hoping that these "newbies" are Rip Van Winkles who have been asleep for 30 years rather than 20. Or maybe he thinks that repeating this enough will make it true. From my previous post:

What are "freshwater" and "saltwater" macro? No idea. In Paul Krugman's own department at Princeton, Richard Rogerson, who was a student of Ed Prescott's, resides with Nobu Kiyotaki, who was a student (or at least a coauthor) of Olivier Blanchard's. There are other macroeconomists there with PhDs from Chicago, Minnesota, and MIT. What school of thought drives that place? Beats me.

If Krugman can't figure out what is going on in his own department, do you think you can trust him to take the pulse of the profession?

A second thing:

So yes, the equations in one of Mike Woodford’s papers look a lot like the equations coming out of Chicago or Minneapolis. And a few years ago it was possible to delude oneself into believing that this represented a true convergence of thought.

There's much more to it than equations. Here's an example. In fall 2008, I went to this conference at the Federal Reserve Bank of Minneapolis. What was it about? Monetary Policy and Financial Frictions. That's in the middle of the crisis, and it was certainly topical. I didn't see anyone there obsessing about TFP shocks. People came from across the country - Princeton, Chicago, MIT, Northwestern, Stanford, Columbia, etc.

One paper I saw was Mike Woodford's work with Curdia. Woodford/Curdia start with a basic NK framework and add a financial friction, in part by introducing some heterogeneity to generate borrowing and lending. When I first saw the program, I was wondering why Andy Atkeson was discussing the paper. I wouldn't have thought that Andy knows much about NK models. Wrong. Actually, what Mike was doing uses some ideas from the market segmentation literature that Andy has done work in. There was basically a set of shared ideas, techniques, and tricks for getting the job done. Cross-fertilization! Market segmentation is about studying the distributional effects of monetary policy - a nonneutrality of money. Mike works in models where the nonneutrality generally comes from price stickiness. Andy was a Sargent student at Stanford. His first job was at Chicago, and he is now at UCLA. Mike at one time also worked at Chicago, and he was at Princeton, then Columbia.

Here's something I could have said:

I’m not saying that the NK approach is necessarily right; but it’s a serious intellectual effort, undertaken by people who thought they were part of an open professional dialogue.

So Krugman and I have something we can agree on.

Krugman seems to want us to be at each others' throats. Only he can tell us why.