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In this episode, we speak with John Taylor of Stanford University and Harald Uhlig of the University of Chicago, who organized a recent conference that brought together scholars from around the world to write the second volume of the Handbook of Macroeconomics.
First written 15 years ago, the handbook was designed to be a comprehensive resource on the important concepts governing the course of macroeconomic research. But much has changed about how we understand the macroeconomy in the past 15 years.
John and Harald gathered experts from across the research spectrum in order to produce a new volume that reflected the course of macroeconomic analysis as it stands today: in the wake of a financial crisis we’re still trying to understand, as well as the advent of advanced computational techniques and vast, untapped datasets.
The conference took place in two parts–the first hosted by the Hoover Institution at Stanford University in early April 2015, followed by a second three day conference here at the University of Chicago several weeks later.
At the conclusion of that second conference, John and Harald sat down with us to explain what it means to collaboratively write a comprehensive handbook, and what they learned about the current state of macroeconomic research in the process.
Becker Friedman Institute: How do you feel about how the conferences went?
John Taylor: Good. I feel good. We haven’t chatted about it but it was good. We are going to look forward to looking at the papers and thinking more about it. But what I think [is that] it was a wide range of topics, which reminds one how diverse the field of macroeconomics is. People did good jobs presenting them and the discussions were as good as you can get. They were really very thorough. I liked it.
Harald Uhlig: The challenge with a handbook like this is always for authors to eventually write the chapter. I thought having this conference was brilliant–as one discussant put it during the conference, it was a little bit like midterm. There is nothing like peer pressure to deliver something.
So many authors, a few days before the conference, eventually delivered the written draft, and everybody had something at the conference. Many of these things not fully worked out but interesting and thoughtful written progress.
Now we have something there and authors can finalize it for the final version. I was very impressed with what authors had to say and what discussants delivered.
Given that you have a huge array of speakers, and a huge array of topics being brought into the macro context, did you see a common thread through some of the updates people were making into older lines of research or newer lines of research that were being brought into the volume?
John: I think as we expected there was a lot on the financial crisis, and slow recovery and how that should affect your thinking about models and assessing the adequacy of models that were there before. I think that may be a theme that’s most common because so much has happened since the last [volume]. But in general, a lot of things have happened in the economies.
People were trying to explain why we had that sharp drop in the great recession, seeing whether say the models that the European Central Bank uses are adequate or whether they needed to be changed. One paper tried to say, “Well, suppose we modify that model to include more of financial frictions, would it work better?” The answer was, “Well, only little.”
It suggests there’s some more to thinking to do about that. But I’d say that’s probably one big common theme.
Harald: It was no accident either. The macroeconomics has changed so much since the last time [the handbook] came out. Not only that, but we also have the big financial crisis that had led to a lot of macroeconomists rethinking many issues in macroeconomics, or, at least, may coalesce more or less on themes that were there before to some degree, but have now attracted many more researchers.
When we sat down, and thought about which chapters to include, we thought hard about having more chapters on financial markets in the macroeconomy, for example, which is a theme that had emerged, but also chapters on new Keynesian dynamics, fiscal multipliers, fiscal crises—which right now in Europe, for example, play quite a role, but also play a role in the United States.
Many of the issues that recently surfaced in terms of real events, and that have led to changing the research agendas of some of our colleagues, and new developments in macroeconomics are reflected in these chapters, partly by our choice I would say.
John: [In planning the conference,] we tried to reflect what’s going on in the field, and as best we can choose topics reflect that.
There’s also things that have happened over time that are unrelated to the crisis which the world goes on in other ways. One thing I picked up on, I don’t know if Harald would agree, that it seems there’s many more papers or models that have some kind of a price and wage rigidity in them, at least compared to 15 or 20 years ago, when it was much more common to have real business cycles only. If you think about Volker Wieland’s model database, they are almost something to do with, I would call it frictions, or rigidities in the economy, rather than purely neoclassical, or pure flexibility. That’s a trend, but I don’t think the financial crisis changed that much—It’s because people feel that’s a better way to model things.
Harald: Also general information frictions—heterogeneity—is another theme that strongly emerged in macroeconomic research over the last decade or so, [which is] also maybe unrelated to the crisis.
For example, take Mikhail Golosov’s work presented at the Stanford conference. There’s a lot of development in this area of new public finance where people think about how to design certain contracts in a macroeconomic context, so how to collect taxes from people if you don’t know much about them.
Or today, we saw a paper by George-Marios Angeletos and, where people may have incomplete information about the economy, but also incomplete information about other people in the economy, and how do you react to this.
That’s on the theory side, and then on the empirics, within datasets coming along. Panel datasets on households, zip codes, mortgages and so forth—there’s a lot of research that went into this and that exploits the data for analyzing macroeconomic questions of interest. I think all that work wasn’t there or was in its infancy 15 years ago. That was exciting to see and to bring out in these conferences as well.
Were there tools or aspects that were not at the disposal of researchers 15 years ago that are a core part of this handbook volume? I noticed that at least one of the chapters had a companion software package. Is that something that you saw in the last volume, or is that something that’s relatively recent?
John: Much more so now. You’re referring to the Volker Wieland piece?
Yes.
John: Yes, that was kind of futuristic.
[laughs] He ran it in real time during the presentation.
John: Yes. There’s also computing methods which have changed a lot. We have a paper devoted simply to improvements in the way to compute the solutions of very complicated models with many equations and many non-linearities, and there is a lot of progress that has been made there.
There’s also on the statistical side, we had some papers that have new ways to summarize and characterize data, sort of part of the Big Data movement. That was a Stock/Watson paper talked about analyzing literally thousands of data series to get a sense of where the economy is going. That’s all new.
Harald: In terms of solving these models, that has progressed dramatically since the last handbook. I think some of the ideas were already there. In fact there was this very forward looking numerical solution method by Santos in the previous handbook.
Nowadays using some of these tools that are out there it has become reasonably easy for researchers to take a medium scale model and calculate the solution to that and comparing them. It’s now become even easier with Volker Wieland’s ‘s macroeconomic database.
People take the next step including heterogeneity and including non linearities linking it to asset prices. I think that opened up a whole bunch of possibilities that just didn’t exist 15 years ago.
John: One thing that I think people may not realize about macroeconomics are these fields within it that are quite different and unusual. We had a paper called, “Family Macroeconomics.” The point was that if you’re going to analyze the whole economy, you sort of have to sense of what not just individuals are doing, but what families are doing, and how the family structure’s changed. The role of women in the labor force over time. Maybe that’s part of the explanation for the declining labor force participation rate among men.
Michele Tertilt and Matthias Doepke did a great paper on that. It’s quite striking, if you think about it. That’s completely new.
I sometimes trace it back to Gary Becker, here in Chicago. He gave his presidential address to the American Economic Association way back when, and though he’s not a macroeconomist, it was on macroeconomics. He talked about how these things will eventually be…or should, at least, be eventually influencing macro, and here they are.
Another example, Erik Hurst gave a paper on the time allocation of people, what they do during the day. If they’re not working, what are they doing? Are they working at home, or is it leisure, just taking time with kids?
That affects a lot how we interpret unemployment data, what’s going on over the cycle. Allocation of time and family, it’s quite remarkable how things have changed. It’s part of the world, but also part of the fact that macroeconomists have moved in different directions.
Harald: Some macroeconomists, for example, also now think about how environmental changes, global warming, will impact the macroeconomy in the future. That’s a huge topic. We have a chapter on that that I’m very excited about.
Environmental changes, global warming, is often discussed by natural scientists who sort of go through what happens to the ice caps, and what happens to certain animals, and so forth, but ultimately, care about what happens to humans.
Judging the impact of that requires a macroeconomic model, so combining, thinking hard about the impact of global warming on the economy and on the lives of people. I think that’s a hugely important topic that deserves a lot more attention. I’m excited that we have a chapter on this with authors seriously thinking about this.
There’s a chapter on natural experiments that wasn’t there. It wasn’t a topic that was there before. It looks to me like macroeconomics has branched out into new areas and new themes. It’s exciting to watch it all.
John: Yeah. I think the natural experiments is also important for people to understand. Since the financial crisis, we’ve also had some interventions, public policy changes, stimulus packages. The monetary policy is quite different. That’s like a natural experiment because people didn’t expect it, so it’s different. It’s almost like you’re doing an experiment.
This paper on natural experiments and macro focused a lot on estimated impact of one-time payments to people. There’s a way to randomize that: the way that payments were made based on social security information. I think there will be more and more [research] on that. It’s very current. But it is part of this.
It’s a broader thing in economics, the notion of natural experiments, since it’s not inherently an experimental science. Over the years, people have stressed well there are these things like the draft that have come into play which you can find out a lot about. Or particular public policy change. What happens from one stake to another? And that’s what this natural experiments in macroeconomics is about.
In that similar vein, with two conferences—what was the total presenter count?
John: There were at least 70 people but it’s more than that. I’d say 80 or 90 people presented.
That’s a tremendous amount of work [to combine all their feedback in the volume].
John: Yeah. It is.
What’s the process of synthesizing that into chapters? The groundwork was laid ahead of time but there’s a lot of active discussion, as in any Chicago event. [laughs]
Harald: The chapters were already organized in themes. There’s an outline for the handbook from the get go and the content with the authors. That already provides organizing principles.
Some chapters will have connecting points with each other. John and I will point that out to authors. I’m sure as these chapters get written and redrafted, these authors will be in touch and find out where the lines are, what should be in which chapter. It doesn’t look like there’s a lot of overlap between these chapters so that shouldn’t be a huge issue.
John and I will have to write some way of providing a way of integrating all these chapters in one big vision for macroeconomics.
John: An introduction, which we will do. We also give feedback to the authors based on observations of the meeting, plus on our own reading of the material. Trying to get the level of difficulty pretty common, so it could be used for graduate students or other faculty, sort of a common approach to it. We’ll be working on that.
We have some time. We want the final final draft to be submitted in this December 15th. Then the publisher will start working on copy editing. They’ll have a few more suggestions so we want to get the printed book out by September of next year.
In the first handbook volume, was it written in this way with the conferences associated with it?
John: It was. It’s two different locations too.
These are very similar. The field has changed so much. We look back and see what the difference is in the papers. There are some real classics in that volume and I’m sure there will be some classics in this volume. We won’t be able to tell for some of them for a while because the field will develop where people will start referring to them and referring to the pieces.
Almost all the time with research you don’t know when it’s being done, what’s going to be the most helpful or effective or influential.
Is there an inherent advantage to this approach where you’re synthesizing so many different views together into one singular handbook?
John: Compared to what? One thing, compared it to a regular textbook. There are some graduate textbooks in macroeconomics. They’re put together by one or two authors and they are sort of picking and re-interpreting things.
[Our approach has] an advantage. This is written by the researchers, sort of right from the horse’s mouth. They’re going to be innovative where they want to be. They’re not going to worry about that view and this view. I think it’s a substantial advantage over textbooks. I mean textbooks have their own advantage. That’s the one I would point to for this purpose.
I think from the point of view assigning topics to students, having them read things that were written by the researchers rather than somebody that has interpreted the researchers I think is a real nice thing. They can understand and get an appreciation for what the research is like.
Sometimes the people who are surveying… it will take family macroeconomics. It will be hard to find a textbook writer who will know about family macroeconomics but the people who wrote that chapter know it cold. They’ll do a fairly better job.
John Taylor
Harald: Compared to reading the literature, it provides such an easy access to the literature entry point really. If you want to know about family macroeconomics, you can read the papers by these authors and the other papers and you may know more than a handbook chapter could possibly convey.
To get started in the field and get to the research bunch here as quickly as possible, these handbook chapters are really fantastic. It’s hard to find a good substitute for that.
Is there any work or literature that you felt was particularly important to include for volume two? Conversely, is there anything that you wish you had been able to include but you couldn’t for whatever reason?
John: Macroeconomics has expanded, so it’s more diverse, it’s covered more things. But you really want to have some chapters written on the models that are used for policy. We did several, we did that.
You want to have some chapters that had something to do with looking at the financial crisis. It’s essential to do that. Those are a couple of things that would be really strange not to have something on fiscal policy, something on monetary policy. While this book doesn’t focus on policy per se, it sort of inherently through the whole thing.
There’s a topic in macroeconomics which is business cycles. We have business cycles. A bit crazy not to. Long term growth is another part of it. There’s chapters on long term growth.
In terms of missing things, we have to look at it a little more carefully to see what. There are some chapters that are not complete. They’re sort of in process and some things might be contained in this. We have to see what’s missing.
Harald: We want to think a little bit about other handbooks out there. There’s a recent handbook on economic growth. There’s a recent handbook on monetary economics. One could consider these as sub fields of macroeconomics but there would be little reason to cover them extensively in this Handbook as well.
We tried to find the proper border, and that’s always a tricky thing. I keep on thinking about things and topics that we missed. There surely are some. There surely are people that I wish maybe we would have asked them to come on board.
It’s possible that we stick with the current outline and just leave it there, and I think it’s a good collection of chapters. It doesn’t cover everything in macroeconomics, but it covers a very broad…
I heard one of the truest things said at one of our conferences, which was, “There’s always something we don’t know.”
John: That’s true.
Harald: Right.
John: It’s also, “The more you know the more you know you don’t know.” That’s certainly true. Listening to this. I don’t know Harald, but macro is such a big field you can’t know all of it. I learned a lot, without question.
One topic which we covered a lot which I think was great is housing. Harald had a great paper on the housing boom and bust and how do you think about that. Sufi had a paper here at the business school, Amir Sufi, about how the housing collapse affected people’s consumer durable demand or other kinds of purchases and why that maybe had something to do with the slow recovery.
Up at the Hoover part on the Stanford campus, we had a paper on housing by Monica Piazzesi and Martin Schneider which would try to link it to the macro side a little bit.
It’s not surprising to have that focus, because a lot was going on with housing in this crisis and there’s papers written in a historical fashion which we discussed a little bit today, too, which shows that that’s quite common in other financial crises in other countries at other times.
I’m not going to make you guess what the next financial crisis will be or predict the future.
John: Yeah, thank you.
[laughter]
Do you have a sense given the trajectory of technique, of technology, of datasets that are becoming available, do you have a guess at the research agendas that might shape the third volume?
Harald: I find that incredibly hard. If you had asked me where macroeconomics would be 15 years from now when I looked at the Handbook in 1998 I don’t think I could have possibly envisioned the kinds of chapters, the kinds of things that we have written about, now.
Some of these things were in the works like thinking hard about endogeneity and maybe expanding from America towards thinking hard about some fiscal issues and so forth. So much has come up due to current events and due to the creativity and imagination of researchers.
There’s a lot of rethinking of economics going on all the time. I think that people from the outside that look at universities probably think what we do here is rehash the same themes and the same truth over and over again. What’s going on is that the truth is constantly destroyed on an ongoing basis and there’s new research coming out all the time.
The people that become the future stars are the people that completely rethink an issue that people have believed to be so. They challenge the conventional wisdom. If I knew how to do that, I try to do this myself but if it was clear to me what direction it was going then it would be easy, right? I’d be doing that myself. John would be doing that.
I think we will see lots of future young emerging stars coming out challenging what has been written in this Handbook saying that it’s all wrong and coming up with new insights and that will make the next Handbook all the more exciting.
Harald Uhlig
Sounds like we can get it in 2016?
John: Guess so. We’re on track. This process of having a conference as Harald mentioned is a real deadline and a real catalyst to getting people’s thoughts on paper and getting a first round of constructive critiques and I can now see it getting done.
Great. I look forward to thumbing through my copy.
John: Absolutely.