Monetary Policy, the NK Model, and Humility

In an NBER working paper John Cochrane concludes that

… we have been guilty of playing with too-complex models when we don’t really understand basics, such as stability, determinacy, and the frictionless limit. …

Given the state of actual agreed-on knowledge, central banks’ proclamations of detailed technocratic ability to manipulate delicate frictions is laughable. Figure 10 shows in chart form the Rube-Goldberg list of mechanisms the ECB thinks it understands and can manipulate. Central bankers who think they have any idea how all these boxes and arrows work, and how to manipulate them, should reread Bob’s unsung classic “on a report to the OECD” Lucas (1979) once a week. A little humility would do us all good.