There has been a lot of debate about the state of macroeconomics since the Great Recession. This article provides an interesting perspective on the debate. It argues that much of the resistance to the use of fiscal policy, or strong forms of monetary policy, can be traced back to the Phillips Curve, and to economists centered at the University of Chicago, who developed the concept of the natural rate of employment. The basic idea of the "natural rate" is that there is a predictable trade off between unemployment and inflation. Efforts to cut unemployment below its "natural rate" would lead to inflation. Their version of macroeconomics evolved into a critique of Keynesian concepts which held that monetary and fiscal policy should be used to moderate the short term business cycle. The economy was assumed to be self regulating in the long run. As long as government allowed the money supply to grow with the level of economic output, government intervention in the economy would only make things worse. These ideas evolved into rational expectations theory, and a strong version of the efficient market hypothesis which assumed that asset prices were based upon rational expectations of future income flows by well informed investors. Under the strong version of rational expectations theory "the price was always right". There was no need for central banks to take actions to prevent asset price inflation, or to engage in financial market repression despite a long history of asset price bubbles and subsequent deflation's. Moreover, financial markets played a small role in most macroeconomic models of the "real" economy. Central banks assumed that they could moderate business cycles and provide price stability by managing short term interest rates. New Keynesian economists made a similar assumption. Monetary policy replaced fiscal policy as the preferred method of managing the business cycle.
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