“Our analysis of macroeconomic ﬂuctuations in the previous two chapters has developed two very incomplete pieces. In Chapter 5, we considered a full intertemporal macroeconomic model built from microeconomic foundations with explicit assumptions about the behavior of the underlying shocks. The model generated quantitative predictions about ﬂuctuations, and is therefore an example of a quantitative dynamic stochastic general equilibrium, or DSGE, model. The problem is that, as we saw in Section 5.10, the model appears to be an empirical failure. For example, it implies that monetary disturbances do not have real effects; it rests on large aggregate technology shocks for which there is little evidence; and its predictions about the effects of technology shocks and about business-cycle dynamics appear to be far from what we observe.
To address the real effects of monetary shocks, Chapter 6 introduced nominal rigidity. It established that barriers to price adjustment and other nominal frictions can cause monetary changes to have real effects, analyzed some of the determinants of the magnitude of those effects, and showed how nominal rigidity has important implications for the impacts of other disturbances. But it did so at the cost of abandoning most of the richness of the model of Chapter 5. Its models are largely static models with one-time shocks; and to the extent their focus is on quantitative predictions at all, it is only on addressing broad questions, notably whether plausibly small barriers to price adjustment can lead to plausibly large effects of monetary disturbances.”
David Romer (born c. 1958) is the Herman Royer Professor of Political Economy at the University of California, Berkeley, the author of a standard textbook in graduate macroeconomics as well as many influential economic papers, particularly in the area of New Keynesian economics.
After graduating from Amherst Regional High School in Amherst, Massachusetts in 1976, he obtained his bachelor's degree from Princeton University in 1980, graduating as the valedictorian of his class, and worked as a Junior Staff Economist at the Council of Economic Advisers during 1980-1981, before beginning his Ph.D. at the Massachusetts Institute of Technology, which he completed in 1985. His undergraduate thesis research was published in the Review of Economics and Statistics. Upon completion of his doctorate, he started working as an assistant professor at Princeton University. In 1988 he moved to University of California, Berkeley and was promoted to full professor in 1993
Romer's early research made him one of the leaders of the New Keynesian economics.
In more recent work, Romer has worked with Christina Romer on fiscal and monetary policy from the 1950s to the present, using notes from the meetings of the Federal Open Market Committee (FOMC) and the materials prepared by Fed staff to study how the Federal Reserve makes its decisions. His work suggests that some of the credit for the relatively stable economic growth in the 1950s should lie with good policy made by the Federal Reserve, and that the members of the FOMC could at times have made better decisions by relying more closely on forecasts made by the Fed professional staff.
Most recently, the Romers have focused on the impact of tax policy on government and general economic growth. This work looks at the historical record of US tax changes from 1945–2007, excluding "endogenous" tax changes made to fight recessions or offset the cost of new government spending. It finds that such "exogenous" tax increases, made for example to reduce inherited budget deficits, reduce economic growth (though by smaller amounts after 1980 than before). Romer and Romer also find "no support for the hypothesis that tax cuts restrain government spending; indeed ... tax cuts may increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases."
He has also written papers on some unusual subjects for a macroeconomist, such as “Do Students Go to Class? Should They?”, and “Do Firms Maximize? Evidence from Professional Football.”
He is a member of the American Economic Association Executive Committee, the recipient of an Alfred P. Sloan Foundation Research Fellowship, a fellow of the American Academy of Arts and Sciences, and a three-time recipient of Berkeley's Graduate Economic Association's distinguished teaching and advising awards. Professor Romer is co-director of the Program in Monetary Economics at the National Bureau of Economic Research, and is a member of the NBER Business Cycle Dating Committee.
He is the author of "Advanced Macroeconomics," a standard graduate macroeconomics text, and he is an editor of the Brookings Papers on Economic Activity.
He is known at Berkeley for offering graduate students his "Chicken Soup for Economists," including such advice as "A model should be as simple as possible while still showing the effect we are interested in", "Cite others' work appropriately", "A good paper almost always contains a viewpoint, a lever, and hard work," and "If you find yourself thinking 'But that's how the game is played,' slap yourself. If that doesn't work, take up sheep farming."[