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Where is Macroeconomics heading?


Walras

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I know the world fell out from a lot of macroeconomists in '08, and they're still picking up the pieces. I was just curious what everyone's general feeling was about what's next. Furthermore, are the 2 schools of salt and freshwater heading further apart. I know the vitriol seemed pretty thick at times, but they must be at least united in thinking that serious changes need to be made.
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If there is gonna be change in paradigm, I think that the most probable substitute to neoclassical economics is behavioral economics (maybe some version of synthesis between behavioral economics and neoclassical methodology of microeconomic analysis). If the scientist who lead that field manage to provide more wider methodology grasp, with further application of non-rational behavior that It might substitute neoclassical economic methodology. For macro, I would say that general equilibrium macro-models will be modified to fit non-rationality presupposition. In the macro-int-finance mather things might go towards behavior finance.

 

But, as neoclassical economics didn't, also behavior economics will not be able to understand enough the economic system to predict future crisis. This is just my opinion on how will mainstream economics change. To be specific, I don't think that behavior economic has the adequate or better methodological approach in economics.

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But, as neoclassical economics didn't, also behavior economics will not be able to understand enough the economic system to predict future crisis. This is just my opinion on how will mainstream economics change. To be specific, I don't think that behavior economic has the adequate or better methodological approach in economics.
While I agree behavioral economics may be on the frontier, I disagree about its potential to vastly improve our understanding of crisis. No one is holding out hope that economic models will predict future crisis, but there is an expectation that they will be able to explain crisis after they occur, which goes a long way towards suggesting the best policy options. Neoclassical with its rigid rationality assumptions led to the efficient market hypothesis, which was often applied as a reasoning for deregulation and a lot of blame for the crisis has been laid on its shoulders. Behavioral ideally will bridge the gap to models that allow for catastrophic human failures, and possibly, if we can invent something with the mathematical rigor of neoclassical economics and the external validity that Keynes appears to have we could see the great divide in macro start to close.
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I think the problem is that macroeconomics has now been infused with this political element that was largely absent before 2008. You can't discuss Keynesian vs. Neoclassical without getting bogged down by the political responses to the financial meltdown. The challenge will be sorting out bad policy from bad politics from bad economics as we continue to do a post mortem on the crisis and how we responded.
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I think the problem is that macroeconomics has now been infused with this political element that was largely absent before 2008. You can't discuss Keynesian vs. Neoclassical without getting bogged down by the political responses to the financial meltdown. The challenge will be sorting out bad policy from bad politics from bad economics as we continue to do a post mortem on the crisis and how we responded.

 

While it's gotten more overt since the crisis, but I would argue that there have always been political dimensions to macroeconomic policy that have at times constrained and directed the field's research agenda. Long before the Bush financial crisis, conservative think tanks, dissatisfied with the policy prescriptions of Keynesians, used their influence and resources to encourage the development of alternative theories that originated in academia but were supported in various ways because these new theories satisfied certain political narratives.

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It's funny. You'd think macro would keep getting clearer and clearer as the time series data gets longer, but it feels like '08 set us back intellectually 20 years at least by calling into question a lot of what everyone had been doing. I'm curious what techniques people will resort to now in terms of forecasting, prediction or long term modeling when you've got great recessions/depressions appear like black swans every century or so. Do you talk to the cliometricians? In case you've never heard of it (I certainly hadn't until this year) its like an intersection of economic history and econometrics. Presumably there might be important insights for macro using very poor ballpark data but insanely long time series like 2000 years to capture patterns on black swan depressions.
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The neoclassical/Keynesian debate is overstated in the media - academics are not really fighting against one another within academia (I won't say the same when it comes to blogs, op-eds and interviews...). The 2008 crisis has actually had very healthy repercussions in academic macroeconomics: check the work by Gertler-Kiyotaki on business cycle models with information asymmetries in the financial sector. It has been really groundbreaking and provides some hope that new keynesian DSGE's were not that useless after all.
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academics are not really fighting against one another within academia

 

Macro really isn't my thing, but my sense is that there's definitely tensions with respect to basic assumptions that continue to persist. The field is less divided on methodology, but there's still active disagreement on what sets of assumptions to feed into a DSGE-style framework.

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The neoclassical/Keynesian debate is overstated in the media - academics are not really fighting against one another within academia (I won't say the same when it comes to blogs, op-eds and interviews...). The 2008 crisis has actually had very healthy repercussions in academic macroeconomics: check the work by Gertler-Kiyotaki on business cycle models with information asymmetries in the financial sector. It has been really groundbreaking and provides some hope that new keynesian DSGE's were not that useless after all.

 

The lack of debate about the fundamentals of macroeconomics is not an advantage rather disadvantage of the field. If it so poor in predicting the trends, and its methodology depends on probable and in average good predictions of the trends in future, than the foundations are not right

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Regarding the Saltwater and Freshwater thing there has been a lot of convergence between the two. There seems to be a degree of animosity among old guards in the profession, but I don't think that same animosity exists among those who graduated during the time the divide was at its worse. Rather today macroeconomics theory is more unified in its approach than before. My principle mentor as an alumni of Rochestor in the mid 1990s and he said that it would have been sin to talk about price stickiness. But many people in his cohort have made important contributions to the New Keynesian literature. Right now where there seems to be a big divide is between theoretical and empirical macroeconomics. There are places where the two intersect, but there are many places where you would not recognize the two as belonging to the same field and whole schools which practice one and not the other.

 

Now where have we headed? Its a bit to think that macroeconomics agenda has been completely reset because of the 2008 crisis, and even more foolish to think that macroeconomics will be redefined. Contribution too economic literature generally is small and incremental. Contributions from 1970s through the mid 1990s are methodological and its foolish to think that methodological contributions to theory will just disappear. Keynesian macroeconomics didn't die because of its ideological perspective, instead methodological. The models treated too many variables as exogenous and really relationships were simply assumptions rather than internally consistent derivations.. A good set of notes that explicitly identifies this can be found here:

 

http://www.eui.eu/Personal/corsetti/NOEM/mundell-fleming.pdf

 

 

This essentially led to most of the substantial contributions of 1970s to 1990s. That changed the way macroeconomics was methodologically done so that we were left with Dynamic General Equillibrium Macroeconomics which created an unified approach to doing macroeconomics. This is important because it means that we are left with theory that is unified in its approach and clear in its contributions (or non contributions). However, where the gap lies is that macroeconomics probably needs to move closer towards empirical economics. That macroeconomics will also have to become more flexible in both its assumptions to produce new insights. Since the crisis there has been a demand for more heterogeneous agent macroeconomics as well as increased sophistication in modeling financial markets. One interesting new author I have been paying attention to is Guati Eggertson, as well as authors such as Mendoza and Devereaux.

 

 

On a different topic this has a beautiful discussion on where monetary economics is going.

http://www.econjobrumors.com/topic/where-is-monetary-economics-going

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