Macroeconomics

A gap between theory and reality has haunted economists.

We develop a neo-Kaleckian growth model that emphasizes the importance of consumption behavior.

This paper sketches the outlines of the new international monetary system that has emerged in the aftermath of the global financial crisis.

This paper studies the role of credit in the business cycle, with a focus on private credit overhang.

This paper traces the evolution of the concept of the cyclically adjusted budget from the 1930s to the present.

This essay critically evaluates the benefits and costs of the dominant methodology in macroeconomics, the DSGE approach. Although the approach has led to great progress in some areas, it has also created biases and blind spots in the profession that hold back our understanding and our ability to govern the macroeconomy. There is great scope for progress in macroeconomics by judiciously pushing the boundaries of some of the methodological restrictions imposed by the DSGE approach.

US Military needs during the Cold War induced a mathematical modeling of rational allocation and control processes while simultaneously binding that rationality with computational reality. Modeling strategies to map the optimal to the operational ensued and eventually became a driving force in the development of macroeconomic dynamics.

This paper, an extension of the Presidential Address to the International Economic Association, evaluates alternative strands of macro-economics in terms of the three basic questions posed by deep downturns: What is the source of large perturbations? How can we explain the magnitude of volatility? How do we explain persistence?

And how do they relate to our democratic institutions and institutional social relations?

The recent financial crisis has impressively illustrated the dangers of rapid credit growth in a painful way.

There is now a growing consensus among policymakers and academics that a key element to improve safeguards against financial instability is to strengthen the “macroprudential” orientation of regulatory and supervisory frameworks.

The Eurozone crisis has been wrongly interpreted as either a crisis of fiscal profligacy or of deteriorating unit-labour cost competitiveness (caused by rigid labour markets), or a combination of both.

A survey on behalf of the Sueddeutsche Zeitung indicates that German economists are much more American in their thinking than is presumed – with a rising trend.

This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness.

This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness.

Good incentives are no substitute for good citizens.

Non-mainstream economists are disputing neoclassical ideas about capital.

The monetary-fiscal policy connection is under scrutiny by the German Constitutional Court in the context of the ECB’s OMT bond-buying programme. This column argues that most analyses are deeply flawed by the misapplication of private-company default principles to the central bank. ECB bond-buying transforms public bonds into monetary base, and sovereign-default risk into inflation risk. The real question is: What is the non-inflationary limit to money-base expansion? This depends upon the economic situation and is much higher in the current liquidity-trap setting.

Motivated by the long-standing debate on the pros and cons of competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country’s international competitiveness. We refocus the analysis on the implications of monetary stabilization for a country’s comparative advantage.

The former chairman of Britain’s Financial Services Authority and author of the forthcoming book “Between Debt and the Devil” explains why private debt, not banks, deepened the financial crisis and continues to cause trouble today.

Senator Elizabeth Warren, Federal Reserve Chairman Janet Yellen, and IMF Managing Director Christine Lagarde joined a renowned group of globally influential women in discussing how the financial system can be re-imagined to truly benefit society.

In recent decades, advanced economies have experienced low and stable inflation and long periods of liquidity trap. We construct an alternative business-cycle model capturing these two features by adding two assumptions to a money-in-the-utility-function model: the labor market is subject to matching frictions, and real wealth enters the utility function. These assumptions modify the two core equations of the standard New Keynesian model

In much of Europe, the social rights and social protections won in the first post-war decades, by labour movements in particular, have subsequently been seriously eroded, and are further threatened by neoliberal austerity.

This paper presents a theory of pseudo-wealth in a model that displays aggregate demand externalities.

The inequality of income and wealth is one of the defining issues of our time, in terms of both its social and macroeconomic implications. In this article, I focus on the macroeconomic implications of inequality. In particular, it is possible to identify four themes on which there seems to be growing consensus among many economists especially in the various heterodox traditions, but also increasingly in the mainstream of the economics profession:

In his latest annual address at Cass Business School, Visiting Professor Lord Adair Turner warned that the world is caught in a ‘debt overhang’.

We call attention to the class of models that serve as the foundation for the rational expectations hypothesis (REH). Models in this class rule out completely any structural change that cannot be fully anticipated with a probabilistic or other quantitative rule. REH models are abstractions of rational decision-making, but only in a hypothetical world in which participants can fully anticipate when and how they might revise their understanding of the process driving outcomes.

We propose several multivariate variance ratio statistics. We derive the asymptotic distribution of the statistics and scalar functions thereof under the null hypothesis that returns are unpredictable after a constant mean adjustment (i.e., under the weak form Efficient Market Hypothesis). We do not impose the no leverage assumption of Lo and MacKinlay (1988) but our asymptotic standard errors are relatively simple and in particular do not require the selection of a bandwidth parameter. We extend the framework to allow for a time varying risk premium through common systematic factors.

We develop adjustments to align the NIPA measures of key household flows with cash flow concepts that better reflect household budgets and demand.

How can we reconnect economic success to socioeconomic outcomes?

As the pace of financial crises quickens and the volatility of economic shocks intensifies, we need new ways to understand and respond to instability. This program coordinates our research efforts on finance, macroeconomics, and monetary economics.

Michael Greenberger discusses the current state of play of regulatory reform and gives a barely passing grade.

Rana Dasgupta shares his view of the contradictions and tensions of India’s economic and political scenes.

This chapter surveys experimental research on networks in economics.

It is highly fitting to have a panel devoted to ‘teaching economics’ in Paris. No less than 15 years ago, in 2000, in downtown Paris, a group of students from the École Normale Supérieure, one of France’s élite schools, wrote a petition asking economics teaching to be devoted to the study of real-world problems, with an instrumental use of mathematics rather than to the description of imaginary worlds based on meaningless formalizations.

With the approval of the reform proposals by the Greek government, the Eurozone has returned to calmer waters. But it is only a brief interlude.

I need a history of policy evaluation.

John Smithin argues that we need to rethink the “consensus” with tools old and new.

Private data is leaked more and more in our society. Wikileaks, Facebook, and identity theft are just three examples. Network defenses are constantly under attack from cyber criminals, organized hacktivists, and even disgruntled ex-employees.

Bill Mitchell presents a coherent analysis of how money is created, how it functions in global exchange rate regimes, and how the mystification of the nature of money has constrained governments, and prevented states from acting in the public interest.

How should the Eurozone handle unemployment and other immediate hurdles?

The recently observed surge in wealth doesn’t equate to growth of productive capital. Joseph E. Stiglitz, Branko Milanovic, Paul Krugman and Duncan Foley discuss these issues and more.

Few would argue that America’s fortunes rise and fall on its ability to generate technological innovations — to put bold ideas to work and then bring them to market.

How can we better integrate history into economic analysis?

Readers of Minsky are familiar with the idea that governments should act as financial stabilizing agents for their economies by running surpluses in times of boom and deficits in times of crises.

Economists discussing the problem of radical uncertainty commonly invoke Frank Knight’s classic definition in Risk, Uncertainty and Profit, but only rarely venture to explore the broader contours of his argument.

Pisani-Ferry discusses the challenges facing the creation of a common monetary union in the form that was eventually agreed in the 1990s absent a political union.

What exactly is an exchange rate?

Reflections of the Université Catholique de Louvain “Macroeconomics in Perspective Workshop”

Bubbles have become a major focus of discussion in today’s financial markets. But very few people actually define what they mean when describing this financial phenomenon.

Does it matter if the Rational Expectations Hypothesis is unrealistic?

We analyse the link between income distribution and the current account for the period 1972-2007. We find that rising (top-end) personal inequality leads to a decrease of the current account, ceteris paribus.

The main goal of the macroeconomist is to understand the sources behind business cycles and the behavior of financial markets in the modern economy.

What happens when a market-based economy becomes a market-based society?

The destruction of trust is not an accident.

This workshop has the dual aim to expose mathematicians to new research problems in economics and economists to new techniques and developments in mathematics.

The rescue of Cyprus was a microcosm of how the nations of Europe have failed to work together to adequately address their ongoing financial crises.

In the aftermath of the 2008 financial crisis, distrust in the financial sector was widespread. Even after the mess appeared to be cleaned up, the uncertainty over whether the worst was over remained real.

Finance is built on trust. It is based on promises about tomorrow, often paper promises backed by nothing other than words on a page. When trust in those promises breaks down, so too does the financial system. That is the lesson of thousands of years of history.

“You are now leaving the world as you know it.”

World leaders who are gathering for the APEC summit next week had hoped to be signing the Trans-Pacific Partnership Agreement (TPP). The pact would bring together key Pacific-rim countries into a trading bloc that the United States hopes could counter China’s growing influence in the region.

The failure of Lehman Brothers on 15 September 2008 marked the beginning of the end of the world’s love affair with financialization.

Simon Johnson, Professor at MIT and former chief economist of the IMF, calls for much higher capital requirements for big banks.

Let Them Eat Credit: Has Financial Capitalism Failed the World?

Did the global economic collapse in 2008 stem from structural failures in the capitalist system?

Is China is “too big to fail.”?

In this short interview, Institute co-founder George Soros tackles the question at the heart of the Institute’s mission: What’s wrong with economics and what can we do to change it?

To what extant do existing mainstream models properly address issues such as heterogeneity and interactions, which are considered central ingredients to understand economic crises as emergent, endogenous phenomena.

How does debt influence growth?

The recent debate about the reproducibility of the results published by Carmen Reinhart and Kenneth Rogoff offers a showcase for the importance of replication in empirical economics.

INET Advisory Board members Carmen Reinhart and Kenneth Rogoff today issued a response to recentcriticism of their paper “Growth in a Time of Debt.” Their response in full is below.

These are extraordinary times for central banks. Near zero interest rates and massive liquidity injections are still failing to bring life back to so many economies in the developed world.

“Look! Up there in the sky! What is it? Is it a plane? Is it a bird?” No, it’s a distraction from the robbery that is taking place in broad daylight on the ground.

The exteriors of major central banks may be solid marble and doric columns, but, inside, monetary policy remains a work in progress.

Only a few years ago, comparisons of American politics to opéra bouffe were not outrageously farfetched at least if you were not poor or sick.

Since the dawn of this millennium, and long before the current financial turmoil and the subsequent bitter pill of austerity therapy hit the Untied States and the European Union, the Chinese Communist Government has publicly recognized the monumental challenge of polarity.

A core puzzle in Önancial economics is the inability of standard risk-premium models to account for excess returns in currency and other asset markets.

The global financial crisis led to the rediscovery of ‘fundamental uncertainty’. Incorporating uncertainty into the analysis of financial markets alters our understanding of how these markets operate and expose the two-faced role of law in finance.

There is much anecdotal evidence in the popular media, backed up by survey research, that participants in currency markets pay close attention to fundamental economic variables in forming their forecasts of future exchange rates.

For macroeconomists, an individual is rational if she uses her understanding of the way the economy works in making decisions that do not conflict with her objectives.

The present-value model of stock prices is a workhorse in financial economics. The model relates today’s price of a stock (or a basket of stocks) to the market’s forecasts of next-period’s price and dividend, appropriately discounted.

In this paper, we examine one of the core puzzles in International Macroeconomics, the so-called “forward-discount anomaly.”

A core premise of contemporary economic models is that researchers can adequately specify in probabilistic terms how individuals alter the way they make decisions and how the processes underpinning market outcomes unfold over time.

The first part of this text comes back on the standard economic viewpoint on expectational coordination, a viewpoint that the recent events have challenged.

State and market are often depicted as distinct, even antagonistic. Markets appear as natural products of spontaneous ordering; states as leviathans that if left untamed will distort, if not destroy markets’ natural state.