QUESTION:

Hi Miles. I am a PhD student just commencing the thesis writing process. I have been focussing on the literature that has evolved from your paper ‘Sticky Price Models and Durable Goods’. Much of the work following this paper focusses on solving the co-movement problem between durable and non-durable consumption with sticky prices, sticky wages and/or credit frictions. I would like to ask your opinion on interesting research directions in this area.  –chrisp1979

ANSWER:

Not everything the economy produces is alike in how it affects the economy as a whole. So in my view, considerably more research effort should be devoted to macroeconomic models of the economy that treat different sectors of the economy as different in important ways. And how goods relate to the time-dimension (durable like cars or nondurable like fast food) is one of the most important differences between different categories of things the economy is producing.

In giving more specific advice, I worry a little about whether my taste conflicts with the taste of those you need to appeal to. You should keep in mind that I am, in the first instance, a macro theorist.  (Indeed, early on in graduate school I thought I would grow up to be a micro theorist.) In any case, I feel we know so little about the behavior of multisector models that it is premature to try to get a particularly result.  In this area where we don’t even know very basic things from a theoretical point of view, I have thought it too bad that so many researchers rush so fast to try to get a model that has a particular result–in this case comovement of the sort you are mentioning. What I think we need is much more understanding of multisector models in general. 

I would much rather have someone study a range of multisector models that seem reasonable based on first principles and see what they do rather than just contrive something with no particular plausibility that gets this particular comovement. If you set out to understand what multisector models want to do without coercion, I think that is a valuable addition to knowledge. Better to find that a reasonable, plausible model doesn’t seem to match what is happening in the world–and so have an interesting question to mull over about what is going on in the real world that makes it act differently than the model–than to search through model space to find an unreasonable, implausible model that can match one particular fact.

In other words, I think many papers written these days (particularly in this topic area) misunderstand the task, which is to find plausible reasons that are likely to be true for why some aspect of the world is the way it is rather than some reason that could possibly explain a fact about the world.

Judgments about plausibility of assumptions are key. That is why I would rather have someone pursue a model with good assumptions (some combination of plausibility and simplicity), study it carefully to see what it does, and help the economics profession gradually learn about the mapping between various attractive assumptions and the implications that flow from those assumptions.

But given an open mind, trying to understand how the models work, multisector models are a great area, and many different models would be very interesting, worthy dissertation topics. As long as you start with what you think is a good multisector model that you study to see where it leads rather than starting with a particular result you want to get, I think I would personally find it interesting. 

An example of some good research in this area is the work of the Bank of Japan’s Nao Sudo that has focused on the input-output structure of the economy, which is a very plausible, non-forced mechanism for generating comovement between sectors. Nao’s paper is slated to come out in the JMCB.