I'm not Yellen

A google for macroeconomics blog turns up plenty, with Greg Mankiw for some reason at the top of the list. Second on the list is also Mankiw, with this: "Behavioral Macroeconomics. The Boston Federal Reserve Bank is aiming ..."

First time I heard of "behavioral" economics was when Krugman said he thought it was the future of economics. I'm sensitive to that for obvious reasons (need I say arthurian economics is the future?) so I sort of took an immediate dislike to behavioral.

Anyway, behavioral economics has to be some kind of advanced science like they use in commercials to get you to buy what they want you to buy, and in poll questions to get you to give the answer they want to get.

So, google brings me to Mankiw, who mentions

...behavioral economics (the oddly named subfield that emphasizes the intersection of economics and psychology)...

which is enough to convince me I was right about what behavioral economics is.

Then the boyish Mankiw provides a link to "Janet Yellen's talk at the conference on 'Implications of Behavioral Economics for Monetary Policy'." Now that sounds like it has some meat to it. Meat? I've got teeth. Let me at it!


Yellen writes:

The Federal Reserve is one of a growing number of organizations that have already taken some implications of behavioral research to heart. This year, we began to automatically enroll new employees into our System’s savings plan, defaulting them into an asset allocation fund that includes fixed income, domestic, and international equity investments. Employees who do not want to participate can, of course, easily opt out. But our early experience mirrors well-known research findings: so far, an overwhelming fraction of employees who were defaulted in remain in. Of course, this choice reflects the Federal Reserve System’s appreciation of the striking findings of behavioral economics...

What's that again?

Our early experience mirrors well-known research findings: so far, an overwhelming fraction of employees who were defaulted in remain in.

See? The usefulness of behavioral economics lies in getting people to do what you want them to do.


To the extent that science progresses by disagreement rather than by discovery, behavioral economics *is* the next logical step after "rational expectations":

Some behavioral models assume that people follow simple heuristics or rules of thumb... Indeed, the psychology and economics literature that builds on the work of Kahneman, Tversky, and others generally concludes that people do not make decisions in the fully rational way commonly envisioned in standard macroeconomic models.

See how they stick the word "rational" in there? (It occurs twice in the unexpurgated paragraph.) They're arguing against rational expectations theory. Trying to build a competing theory they can use to vanquish rational-x.

To that extent, Krugman is right: Behavioral is next.

Then Yellen points to further developments that might be called a study of irrational expectations -- or at least of interpersonal neurosis:

Other behavioral models, including those surveyed by Fehr, Goette, and Zehnder (2007) and by Rotemberg (2007) at this conference, go much further, arguing that individual behavior is affected by a reliance on nominal frames of reference and by considerations such as fairness, envy, social status, and social norms.

Finally, in the juicy follow-up, Yellen writes:

Of course a logical question is why such additional complexities are worth incorporating into macro models if the New Keynesian approach, based on costly price adjustment, is empirically satisfactory. The problem is that the New Keynesian Phillips curve is not fully satisfactory. For example, it is not consistent with contractionary disinflations or with the inflation persistence observed in the postwar period.

The New Keynesian Phillips curve is not consistent with contractionary disinflations or with the inflation persistence observed in the postwar period.

In other words, New Keynesian theory -- which Yellen calls "a standard workhorse for policy analysis" -- explains neither the "inflation persistence" since the second World War, nor the "disinflation" associated with economic contraction. Kinda key points to miss, don't you think? I explain both with a single word: debt.

So is the problem debt, as the Arthurian says, or is the problem that raising prices is a costly process, as the New Keynesian says? You decide.


WORD COUNT

Number of times the word "debt" appears in the Yellen post: ZERO.