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Mind Map
by
Heleen Hofmeyr
, created
more than 1 year ago
Mindmap of different views of the state of modern macro, including Eichengreen, Cabellero etc.
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macroeconomics
session 1
financial crisis
freshwater macroeconomics
macro policy
modern macro
macro
postgraduate
Created by
Heleen Hofmeyr
almost 10 years ago
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3118143
mind_map
2016-11-10T00:31:58Z
State of modern
macro
1. Wickens: nothing wrong with modern macro
2. Caballero:
pretense-of-knowledge-syndrome
3. Blanchard et al: rethinking
macro policy
4. Kirman: crisis for econ theory
Tension between
theory
practice
successful macro
policy = low, stable
inflation rate
if met = no output gap,
natural unemployment
no need to intervene in
financial markets
flexible inflation targeting
only long-run inflation needs
to be low and stable
one instrument = repo rate
more than one instrument
require banks to hold
reserve quantities
CB's as lenders of last resort
increased popularity of
monetary policy (Friedman)
over fiscal (Keynes)
fiscal disproved by
Ricardian equivalence
fin market developments
improved effectiveness of
monetary policy
lags in design & implementation of fiscal
plus short length of recessions = fiscal
measures take effect too late to be useful
fiscal more likely than
monetary to be distorted by
political constraints
financial deregulation
regulation = improper
mingling with functioning of
credit markets
soundness of individual
institutions all that mattered -
no thought of their impact on
macro economy
"Great Moderation"
decline in variability of
output & inflation
looked like it was the
result of better monetary
policy
e.g. advanced economies
responded well to oil price
increases in 1970's & 2000's
Thus crisis unforeseen
Lessons from crisis
1. Stable inflation
necessary, not
sufficient
2. Low inflation limits scope
of monetary policy in
deflationary recessions
3. Financial
intermediation NB
4. Countercyclical fiscal
policy NB tool
5. Regulation not
macroeconomically neutral
6. Need reinterpretation
of Great Moderation
Can't use a single index
No simple relationship between
output and inflation
need to include other indeces,
e.g. housing prices
Need higher inflation & low nominal
interest rates to be able to cut interest
rates in times of crisis
Repo rate sufficient instrument for policy
only as long as demand for liquidity is
limited to banks
not always
the case
prevent asset bubbles - bad because they
form around speculation, not demand for
liquidity
monetary policy not
sufficient (shown by limits of
zero lower bound interest
rates, etc.)
esp when effects of
crisis are expected to be
long-lasting
but only to be used in
times of real crisis, not
during normal business
cycle fluctuations
Not the same as
financial regulation!
regulation contributed to
amplifying effects of decrease in US
house prices to whole world
e.g. allowing different
financial intermediaries to
play by different rules
rules aimed at saving individual
institutions during the crisis
threatened the stability of the
system as a whole
result of better
dealing with SOME
shocks, not all
specifically demand
and supply shocks
but bad at responding
to financial shocks
Implications for design of policy
Can't blame any specific part of fin
system for the crisis; rather, evolution
of system as a whole led to its downfall
response to
argument that crisis
merely part of system
then DGSE models
should incorporate
possibility of crises
explains crisis in terms of
contagion, interdependence,
interaction, networks, and trust
none of these
feature in modern
macro theory
building blocks of macro
individuals act in isolation;
only interact through the
price mechanism
aggregate = sum of parts who
neither observe nor come into
contact with those around them
local interaction NB
in the real economy
transmission of info,
views, expectations
econ system should be
studied like physical system
e.g. heating up a specific volume of water
relations between variables fixed;
system functions at equilibrium in
mechanical way
logically, any
movement
away from
equilibrium
can only be
the result of
an external
shock
NB of norms that develop over time
aggregate behaviour doesn't correspond to
that of a 'rational indivdual'
rather, it's a complex
adaptive system
yet all macro
models assume this
behavioural econ has shown
that individuals aren't rational
why would you assume a whole
made of irrational parts is rational?
no simple relationship
between individual and
aggregate behaviour
not the theory, but the way
the theory was applied that
caused the crisis
macro criticised for not capturing
complexity of human decisions
but that's not what macro is
there for in the first place
it's a series of simplifications which we
should use to gain insight about what
would otherwise be intractable problems
macro has weaknesses, but
these are way fewer than its
strenghts
poor policy & incorrect
assessment of risk by hh's
and banks to blame
current system has incentives for
individuals to deviate from what
macro theory suggests
should align private interests in
banking with public welfare
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