Tuesday, July 15, 2014

Time to Re-Think NBER Programs?

Check out John Cochrane's recent NBER post if you didn't already. It ends with:
A last thought. Economic Fluctuations [an NBER program] merged with Growth [another NBER program] in the mid 1990s. At the time there was a great confluence of method as well as interest. Growth theorists were studying growth with Bellman equations, dynamic general equilibrium models of innovation and transmission of ideas, thinking about where productivity shocks came from. Macroeconomists were using Bellman equations and studying dynamic general equilibrium models with stochastic technology, along with various frictions and other propagation mechanisms. 
That confluence has now diverged. ...  ...when Daron Acemoglu, who seems to know everything about everything, has to preface his comments on macro papers with repeated disclaimers of lack of expertise, it's clear that the two fields [fluctuations and growth] really have gone their separate ways. Perhaps it's time to merge fluctuations with finance, where we seem to be talking about the same issues and using the same methods, and to merge growth with institutions and political or social economics.

[Material in square brackets and bold added by me.]
I agree. Fluctuations and finance belong together. (I'm talking about asset pricing broadly defined, not corporate finance.) Yes, the methods are basically the same, and moreover, the substance is inextricably linked. Aspects of fluctuations are effectively the fundamentals priced in financial markets, and conversely, financial markets can most definitely impact fluctuations. (Remember that little recession a few years back?)

The NBER Summer Institute group in which I most actively participate, Forecasting and Empirical Methods in Macroeconomics and Finance (one of several so-called working groups under the umbrella of the NBER's program in Economic Fluctuations and Growth), has been blending fluctuations and finance for decades. But we're intentionally narrowly focused on applied econometric aspects. It would be wonderful and appropriate to see broader fluctuations-finance links formalized at the NBER, not just at the working group level, but also at the program level.