Monday, March 15, 2010

Robert Schiller: Econometricians Are Clueless

Schiller does not go quite as far as I would and claim that the methodology that econometricians use is faulty and that there are no correct mathematical correlations that can be made with the same accuracy as, say, in physics, but he knows econometrics doesn't work for the current situation:
The problem for macroeconomics is that the types of causes mentioned for the current crisis are difficult to systematize. The mathematical models that macroeconomists have may resemble weather models in some respects, but their structural integrity is not guaranteed by anything like a solid, immutable theory. The most important new book about the origins of the economic crisis, Carmen Reinhart's and Kenneth Rogoff's This Time Is Different, is essentially a summary of lessons learned from virtually every financial crisis in every country in recorded history. But the book is almost entirely non-theoretical. It merely documents recurrent patterns. Unfortunately, in 800 years of financial history, there is only one example of a really massive worldwide contraction, namely the Great Depression of the 1930's. So it is hard to know exactly what to expect in the current contraction based on the Reinhart-Rogoff analysis. This leaves us trying to use patterns from past, dissimilar crises to try to infer the likely prognosis for the current crisis. As a result, we simply do not know if the recovery will be solid or disappointing.
It should be noted that although he recognizes the impossibility of building an econometric model of the current crisis, he fails miserably in understanding that verbal/deductive methods can explain the overall dynamics of the crisis. In other words, another world renown economist who doesn't get business cycle theory.

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