What's Wrong with Modern Macroeconomics? Why its Critics have Missed the Point (original) (raw)

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.

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...

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.

Rethinking Macroeconomics: What Failed and How to Repair it

2011

The standard macroeconomic models have failed, by all the most important tests of scientific theory. They did not predict that the financial crisis would happen; and when it did, they understated its effects. Monetary authorities allowed bubbles to grow and focused on keeping inflation low, partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth. After the crisis broke, policymakers relying on the models floundered. Notwithstanding the diversity of macroeconomics, the sum of these failures points to the need for a fundamental re-examination of the models-and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis. This paper first describes the failures of the standard models in broad terms, and then develops the economics of deep downturns, and shows that such downturns are endogenous. Further, the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued. Finally, the paper contrasts the policy implications of our framework with those of the standard models.

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).

The Current financial crisis and Macroeconomics

This paper is a reflection on the state of mainstream macroeconomics and its (in) ability to predict and explain the recent financial crisis. The paper identifies 'missing historical narrative' and a closely related set of methodological issues as an explanation of the mainstream's inability to explain and predict the crisis.