The Unassuming Economist

From a new post by Timothy Taylor:

“Robert Solow is a notable player in these disputes: in particular, in his 1960 paper with Paul Samuelson, “Analytical Aspects of Anti-Inflation Policy” (American Economic Review, 50:2, pp. 177-194). In an essay in the Winter 2000 issue of the Journal of Economic Perspectives, “Toward a Macroeconomics of the Medium Run,”  Solow addressed this question of thinking about macroeconomic policy in the short- and the long-run. He wrote:

I can easily imagine that there is a “true” macrodynamics, valid at every time scale. But it is fearfully complicated, and nobody has a very good grip on it. At short time scales, I think, something sort of “Keynesian” is a good approximation, and surely better than anything straight “neoclassical.” At very long time scales, the interesting questions are best studied in a neoclassical framework, and attention to the Keynesian side of things would be a minor distraction. At the five-to-ten-year time scale, we have to piece things together as best we can, and look for a hybrid model that will do the job.

In this most recent essay, “A Theory is a Sometime Thing,” Solow pushes this idea of medium-run thinking harder. He acknowledges that if a central bank can only cause the interest rate and unemployment rate to shift for a year or two, in the short-run before a rebound to what is determined in the long run, then when problems of lags in timing are included, macroeconomic policy might be dysfunctional. But if a central bank can affect the interest rate and the unemployment rate for a medium-run period of, say 5-7 years, then even with some uncertainty and lags, macroeocnomic policy may be quite relevant and possible. At one point, Solow writes: “The medium run is where we live.””