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."
On the issue of interest rates, Solow points out in the late 1970s and early 1980s, Paul Volcker's actions pushed up interest real interest rates substantially, such that the real federal funds interest rate "rose sharply to about 5 percent and fluctuated around that level for the next six years ...This sustained 5 percentage point increase in the real funds rate was not a random event. It was a deliberate intervention, designed to end the ‘double-digit’ inflation of the early 1970s, and it did so, with real side-effects. ... So the Fed was in fact able to control (‘peg’) its real policy rate, not for a year or two but for at least six years, certainly long enough for the normal conduct of counter-cyclical monetary policy to be effective.
The history of the Bernanke/Yellen Fed is more complicated ..... The Fed was apparently able to lower the real ten-year Treasury bond rate for half a dozen years, 2011–2016. Of course there are many influences on the real long interest rate; it is at least plausible that large Fed purchases contributed to the outcome that the Fed was consciously seeking. The difference between ‘a year or two’ and ‘half a dozen years’ is not a small matter.What about the natural rate of unemployment? One implication of Friedman's arguments was that if the government used macroeconomic policy in an attempt to hold the unemployment rate below it's natural rate in the long-run, it would lead to surges of ever-higher inflation. As Solow notes, in the 1970s and early 1980s, sharp drops in the unemployment rate do seem associated with rising inflation. But the main story about inflation in the last 20-25 years is that it doesn't seem to react to much: it doesn't get a lot higher or a lot lower as the unemployment rate rises and falls. Solow goes so far as to claim: "[T]there is no well-defined natural rate of unemployment, either statistically or conceptually."
"A few major failures like those I have registered in this note may not be enough for a considered rejection of Friedman's doctrine and its various successors. But they are certainly enough to justify intense skepticism, especially among economists, for whom skepticism should be the default mental setting anyway. So why did those thousand ships sail for so long, why did those ideas float for so long, without much resistance? I don't have a settled answer.
One can speculate. Maybe a patchwork of ideas like eclectic American Keynesianism, held together partly by duct tape, is always at a disadvantage compared with a monolithic doctrine that has an answer for everything, and the same answer for everything. Maybe that same monolithic doctrine reinforced and was reinforced by the general shift of political and social preferences to the right that was taking place at about the same time. Maybe this bit of intellectual history was mainly an accidental concatenation of events, personalities, and dispositions. And maybe this is the sort of question that is better discussed while toasting marshmallows around a dying campfire."Here's a Table of Contents for the relevant papers in the October 2018 issue of the Review of Keynesian Economics: