Pagan on Policy and modelling

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Macrobusiness linked to this video interview with Dr Adrian Pagan.

RBA watchers will find the hour well spent.

Two key points relevant to current policy:

** Price shocks — including the carbon tax — should be looked through; and

** The RBA board does not take any particular series seriously — there has to be a sustained move for a period of time to change the board’s assessment.

And a general point related to modelling:

** You should not be wedded to any particular model, but rather should be looking for the next one — as it’s always something from outside your model that gets you.


  1. Re the last point on models: that’s the very basic principle of science and research in general!

    “A discrepancy in Mercury’s orbit pointed out flaws in Newton’s gravitation theory. By the end of the 19th century, it was known that its orbit showed slight perturbations that could not be accounted for entirely under Newton’s theory, but all searches for another perturbing body (such as a planet orbiting the Sun even closer than Mercury) had been fruitless. The issue was resolved in 1915 by Albert Einstein’s new theory of general relativity, which accounted for the small discrepancy in Mercury’s orbit.”

    “Vulcan was a small planet proposed to exist in an orbit between Mercury and the Sun. In an attempt to explain peculiarities of Mercury’s orbit, in the 19th-century French mathematician Urbain Jean Joseph Le Verrier hypothesized that they were the result of another planet, which he named Vulcan. No such planet was ever found, and Mercury’s orbit has now been explained by Albert Einstein’s theory of general relativity.”

    1. that’s a great example of science in action. I remember learning about kepler’s laws in 1st year uni math, and having the same wonder at the coherence of science.

      there’s some great Feynman lectures that show that same coherence in action — this youtube link will get you started.

      1. When I was a student, this really made me wonder: “a discrepancy of just 43 seconds of arc per century was the “approximation error” of Newton theory” !

        “As seen from Earth the precession of Mercury’s orbit is measured to be 5600 seconds of arc per century (one second of arc=1/3600 degrees). Newton’s equations, taking into account all the effects from the other planets (as well as a very slight deformation of the sun due to its rotation) and the fact that the Earth is not an inertial frame of reference, predicts a precession of 5557 seconds of arc per century. There is a discrepancy of 43 seconds of arc per century.

        That so called “anomalous” advance had already been observed but no final explanation had been agreed on for it. When Einstein discovered that his theory predicted this elusive 43 seconds of arc, it might well have been the greatest scientific moment of his life. He recalled having heart palpitations, being unable to sleep and a sense that something inside snapped.”

    2. As someone with no physics (a regret) the Vulcan explanation sounds like the dark matter idea.

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