Thursday, June 17, 2010

The power of intuitive narrative

This is based on a comment I made here.

Statement A from monetary economist Scott Sumner:
This is why I love monetary economics. It is incredibly counter-intuitive.
Statement B from monetary economist Scott Sumner:
Do you notice that on these major issues the vast majority of mainstream economists were wrong at the time? And do you notice that they were wrong in a particular way? That they underestimated the role of money in driving NGDP shocks.
Conclusion: in times of stress, economists go with the intuitive narrative. For example, that monetary policy is not effective a zero interests rates so we need to go with fiscal stimulus, despite discouraging empirical evidence on the effectiveness of the latter. (Though tossing out the cases that did not fit is moving beyond simple going with the intuitive narrative.)

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