Sunday, August 31, 2014

What The Great Recession Has Taught Us About Macroeconomics

A number of articles have been written about the failure of macroeconomic models to predict the Great Recession.  Nobody is more familiar with those models than Olivier Blanchard who has been a top economist at the IMF.  He provides an understandable description of the assumptions in those models, and he explains why the Great Moderation had deluded economists into believing that the models were able to deal with economic shocks.  There were "dark corners" in the models but most economists believed that they could be ignored.  In this article he argues that: " We were much closer to the dark corners, and that they were darker than we had thought".  He describes the dark corners as well as some of the efforts that are being made to deal with them.  In particular, finance is being incorporated into the models but we may still have to deal with dark corners.  We are a long way from the days of the Great Moderation.

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