Macroeconomic Theory After the Crisis (original) (raw)

Modern Macroeconomics: A Review of the Post 2008/2009 Crisis Debate

This paper reviews the current debate on the state of modern macroeconomics from methodological standpoint. While some senior figures in economics have argued that modern macroeconomics has gone wayward and thus become irrelevant for policy, others argue otherwise. Methodologically, the fundamental sources of dispute have centered on realism of assumptions, mathematical formalism and empiricism and falsification of economic models. Our conclusion from this review is that the observable world upon which macroeconomist rely on to make their assumptions, theories and predictions represent a very tiny fraction of physical reality. Thus any policy derived from such partial and short sighted analysis can only produce a sub-optimal outcome. Moreover, the fundamental analysis employed in macroeconomic analysis overlook peculiarities which should be the rule rather than the exception for addressing important economic conundrums. In short, although we do not support the position of most criti...

The current state of macroeconomics: A view from the textbooks

Journal of Monetary Economics, 1985

The major exception is Barre's (1984) innovative approach in which the IS/LM framework and the Keynesian model are discussed some 480 pages into the text. I will not discuss Barre's text since a complete review of this text is provided by Siegel (1984).

What's Wrong with Modern Macroeconomics? Why its Critics have Missed the Point

2010

This paper argues the case for modern macroeconomics. It explains the reasons why it has replaced previous ways of doing macroeconomics and why it deals with empirical evidence in a different way from conventional econometrics. It is claimed that, far from being in a state of crisis as a result of recent events, modern macroeconomics has received a huge stimulus. The current critics of macroeconomics, like many of those of the past, take its assumptions too literally and misunderstand how the theory should be interpreted for practical use. The financial crisis was brought about more by a failure to employ modern macroeconomics than by its failings. If used sensibly, it will lead us out of the crisis.

Rethinking macroeconomics in light of the U.S. financial crisis

The recent U.S. financial crisis showed that mainstream economics was unprepared to dealwith it. There was a widespread belief in the self correcting power of markets.Most economists not only did not foresee the depth of the current crisis, they did not even consider it possible. Undoubtedly, the recent financial crisis has damaged the reputation of macroeconomics. So,it is time to question what has gone wrong with it and try to put it right.

The Trouble with Macroeconomics

In the last three decades, the methods and conclusions of macroeconomics have deteriorated to the point that much of the work in this area no longer qualifies as scientific research. The treatment of identification in macroeconomic models is no more credible than in the first generation large Keynesian models, and is worse because it is far more opaque. On simple questions of fact, such as whether the Fed can influence the real fed funds rate, the answers verge on the absurd. The evolution of macroeconomics mirrors developments in string theory from physics, which suggests that they are examples of a general failure mode of for fields of science that rely on mathematical theory in which facts can end up being subordinated to the theoretical preferences of revered leaders. The larger concern is that macroeconomic pseudoscience is undermining the norms of science throughout economics. If so, all of the policy domains that economics touches could lose the accumulation of useful knowledge that characteristic of true science, the greatest human invention.

Perspective on the current state of macroeconomic theory

International Journal of Systems Science, 1994

Historically, microeconomics was the domain of scientific methodology in economics, while macroeconomics attracted less mathematically oriented economists. In recent years, the level of sophistication of macroeconomics has grown dramatically, and that field now attracts many of the most mathematically oriented economists. Nevertheless, the field's set of shared views (i.e., maintained hypothesis) has not grown. The purpose of the scientific method is to permit the maintained hypothesis within a field to grow by establishing a rigorous methodology for deductively deriving and empirically testing hypotheses. The field of macroeconomics has failed that test of scientific success during precisely the decades of most rapid growth in the use of scientific methodology. It is argued that the source of the paradox lies in the fact that the inroads of science in macroeconomics have been asymmetric. Central to the definition and objectives of macroeconomics is dimension reduction and dynamics. Rigorous dimension reduction is impossible without formal aggregation, and complex dynamics is impossible without nonlinearity. Yet applications of formal aggregation theory and nonlinear dynamics to macroeconomics have progressed very slowly, at the time that scientific methodology in other areas of macroeconomics have advanced rapidly. This asymmetry explains the paradox.

Rethinking Macroeconomics in Light of the Great Crisis

The recent financial crisis showed that mainstream economics was unprepared to deal with it. There was a widespread belief in the self-correcting power of markets. Most economists not only did not foresee the depth of the current crisis, they did not even consider it possible. The crisis has damaged the reputation of economics, particularly of macroeconomics. This chapter reminds readers of the origin of macroeconomics as a branch of economics. A claim is made to reevaluate Keynes’ original contribution to economic analysis and return to Keynes’ thoughts, which have been ignored or misstated during the past 40 years. The chapter concludes pointing out the need to rebuild macroeconomics as a discipline in which aggregate quantities play an essential role, while prices have only second-order effects.