Episode Summary
Executive Summary: David Beckworth interviews Eric Sims about his path into macroeconomics, the role of theory and general equilibrium in training economists, and his work on monetary policy when interest rates are low. Sims argues for simpler, more transparent models; supports unconventional tools like QE as crisis backstops; sees value in nominal GDP targeting; and is skeptical of permanently higher inflation targets or extreme neo-Fisherian claims.
Main Topics: Sims’ path into economics and academia (Priority: 4/5): Sims describes being influenced by his economist father, discovering economics through self-study, and entering graduate school with broad curiosity rather than a fixed research agenda. He also discusses Notre Dame’s growing economics department and his connection to colleague Rudy Bachman. What cutting-edge macro should look like (Priority: 5/5): Sims argues that macro should move toward smaller, more transparent models that isolate mechanisms and can be communicated to policymakers, rather than increasingly complex DSGE systems with many moving parts. HANK, TANK, and the role of heterogeneity (Priority: 5/5): He explains why heterogeneous-agent New Keynesian models are attractive for capturing MPC effects and realistic transmission, but warns they can become black boxes. He favors simpler two-agent (TANK) approaches as a compromise. Why macro belongs in graduate training (Priority: 5/5): Sims defends first-year macro in PhD programs, arguing that economics needs theory, incentive analysis, and general equilibrium reasoning to scale micro evidence into aggregate policy conclusions. Four-equation model, QE, and low-rate policy (Priority: 5/5): He outlines a compact model developed with Cynthia Wu to analyze unconventional monetary policy, including QE, forward guidance, and negative rates, with financial intermediation frictions and credit spreads at the center. Nominal GDP targeting as a practical rule (Priority: 5/5): Sims reports that nominal GDP targeting performs well in model comparisons, especially when output-gap measurement is uncertain, and argues it is easier to communicate than inflation-only frameworks. Skepticism about neo-Fisherism and higher inflation targets (Priority: 4/5): He says standard NK models can generate neo-Fisherian results, but these depend on strong forward-looking assumptions. He also argues that moving from 2% to 4% inflation likely carries meaningful welfare costs and is a poor solution to the zero lower bound.
Key Arguments: Macro should focus on smaller, cleaner models that make policy mechanisms transparent; large, highly parameterized DSGE systems risk becoming as opaque as old large-scale econometric models. HANK models add realism through heterogeneity and MPC channels, but their quantitative results can depend heavily on hidden assumptions such as transfer rules, making them hard to interpret. TANK models offer a useful middle ground by combining a hand-to-mouth consumer with a forward-looking saver, preserving key transmission channels while remaining easier to communicate. Graduate macro training is essential because applied micro evidence is usually partial-equilibrium; policy questions require understanding general equilibrium, incentives, and interactions across markets. QE is best understood as a temporary crisis tool that can substitute for interest-rate policy when credit intermediation is impaired, not as a universal long-run policy instrument. The zero lower bound is not as catastrophic as textbook models suggest because central banks can use QE and other tools to offset short-term-rate constraints. Nominal GDP targeting is attractive because it builds in forward-looking stabilization, is easier for the public to understand, and can approximate more ideal but unobservable targets. Raising the inflation target from 2% to 4% may impose larger welfare and coordination costs than often assumed, because higher trend inflation creates real frictions and communication burdens. Neo-Fisherian policy claims weaken once expectations are less than fully forward-looking; the standard result relies heavily on highly rational, forward-looking agents. Central banks should stick to what they can credibly control—price stability and full employment—rather than expanding into broader mission creep like inequality or climate. The decline in equilibrium interest rates is a structural and global phenomenon, not something caused primarily by central bank policy; policymakers must adapt to it rather than be blamed for it.
Data Points: Notre Dame economics faculty size: 39 tenured faculty - Sims says the department has grown substantially since restarting in 2006. Initial Notre Dame economics faculty size after restart: about 14 faculty - He recalls the department being much smaller when he arrived. Years at Notre Dame: 11th year - Sims says he is in his 11th year at the institution. PhD year: 2009 - He notes he received his doctorate at the onset of the post-crisis macro debate. Low-rate period discussed: about 10 years - Sims says short-term interest rates have been very low for roughly a decade. Inflation target example: 2% to 4% - He discusses the costs of raising trend inflation to create more policy space. GDP target example: 4% per year - He cites nominal GDP growth targeting as a simple communication benchmark. Policy rate adjustment example: 500 basis points - Sims and Beckworth reference the typical magnitude of rate cuts in a recession. Long-term rate example: 10-year Treasury yield - They discuss concerns that long-term yields may also be too low to provide ample room in downturns.
Pivotal Quotes: "If you want to study philosophy, study philosophy. If you want to study history, study history. If you want to study mathematics, study math. If you want to do all of these things, study economics." — Eric Sims: He explains why economics appealed to him as a broad, rigorous discipline. "I think the real key and what the best macro research going forward is going to focus on relatively small scale models that you can tease out intuition and cleanly communicate policy advice to folks." — Eric Sims: He describes the direction he thinks macro should move in. "I think the zero lower bound was not the constraint on policy that it might have otherwise been or that one might think on the basis of sort of a simple three-equation model." — Eric Sims: He summarizes his view that unconventional tools softened the ZLB problem.
Implications: The conversation favors simpler, mechanism-focused macro models and pragmatic monetary tools. For policymakers, it supports nominal GDP targeting, selective use of QE, and caution about higher inflation targets or broad mission creep.
About Macro Musings
Hosted by David Beckworth of the Mercatus Center, Macro Musings pulls back the curtain on the important macroeconomic issues of the past, present, and future.