The incomparable Falkenstein on some of the conceptual difficulties with typical AS/AD thinking.
I still think macro is pretty useful, but i do try and pay attention to the micro stuff as well. As Australia showed in the 90s, getting the Micro right improves Macro performance as well.
Agree. However I thought he overreached. AD is still a valuable concept – as long as micro foundations aren’t completely gummed up. I just don’t see that.
For me the subtle point he has made is that a two sector model with money and widgets is much more abstract than most think. The conclusion that depressed GDP suggests too tight money is nearly tautological – money is the ‘other side’ and lowering its price means raising the general level of prices, which means higher GDP.
Market-monetarists like Sumner ought to be very cautious about their models in practice.
I suppose it suits me to cite this as i am very uncomfortable with these models.
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