Heleen Hofmeyr
Mind Map by , created more than 1 year ago

Mindmap of different views of the state of modern macro, including Eichengreen, Cabellero etc.

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Heleen Hofmeyr
Created by Heleen Hofmeyr almost 10 years ago
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State of modern macro

State of modernmacro1. Wickens: nothing wrong with modern macro2. Caballero:pretense-of-knowledge-syndrome3. Blanchard et al: rethinkingmacro policy4. Kirman: crisis for econ theoryTension betweentheorypracticesuccessful macropolicy = low, stableinflation rateif met = no output gap,natural unemploymentno need to intervene infinancial marketsflexible inflation targetingonly long-run inflation needsto be low and stableone instrument = repo ratemore than one instrumentrequire banks to holdreserve quantitiesCB's as lenders of last resortincreased popularity ofmonetary policy (Friedman)over fiscal (Keynes)fiscal disproved byRicardian equivalencefin market developmentsimproved effectiveness ofmonetary policylags in design & implementation of fiscalplus short length of recessions = fiscalmeasures take effect too late to be usefulfiscal more likely thanmonetary to be distorted bypolitical constraintsfinancial deregulationregulation = impropermingling with functioning ofcredit marketssoundness of individualinstitutions all that mattered -no thought of their impact onmacro economy"Great Moderation"decline in variability ofoutput & inflationlooked like it was theresult of better monetarypolicye.g. advanced economiesresponded well to oil priceincreases in 1970's & 2000'sThus crisis unforeseenLessons from crisis1. Stable inflationnecessary, notsufficient2. Low inflation limits scopeof monetary policy indeflationary recessions3. Financialintermediation NB4. Countercyclical fiscalpolicy NB tool5. Regulation notmacroeconomically neutral6. Need reinterpretationof Great ModerationCan't use a single indexNo simple relationship betweenoutput and inflationneed to include other indeces,e.g. housing pricesNeed higher inflation & low nominalinterest rates to be able to cut interestrates in times of crisisRepo rate sufficient instrument for policyonly as long as demand for liquidity islimited to banksnot alwaysthe caseprevent asset bubbles - bad because theyform around speculation, not demand forliquiditymonetary policy notsufficient (shown by limits ofzero lower bound interestrates, etc.)esp when effects ofcrisis are expected to belong-lastingbut only to be used intimes of real crisis, notduring normal businesscycle fluctuationsNot the same asfinancial regulation!regulation contributed toamplifying effects of decrease in UShouse prices to whole worlde.g. allowing differentfinancial intermediaries toplay by different rulesrules aimed at saving individualinstitutions during the crisisthreatened the stability of thesystem as a wholeresult of betterdealing with SOMEshocks, not allspecifically demandand supply shocksbut bad at respondingto financial shocksImplications for design of policyCan't blame any specific part of finsystem for the crisis; rather, evolutionof system as a whole led to its downfallresponse toargument that crisismerely part of systemthen DGSE modelsshould incorporatepossibility of crisesexplains crisis in terms ofcontagion, interdependence,interaction, networks, and trustnone of thesefeature in modernmacro theorybuilding blocks of macroindividuals act in isolation;only interact through theprice mechanismaggregate = sum of parts whoneither observe nor come intocontact with those around themlocal interaction NBin the real economytransmission of info,views, expectationsecon system should bestudied like physical systeme.g. heating up a specific volume of waterrelations between variables fixed;system functions at equilibrium inmechanical waylogically, anymovementaway fromequilibriumcan only bethe result ofan externalshockNB of norms that develop over timeaggregate behaviour doesn't correspond tothat of a 'rational indivdual'rather, it's a complexadaptive systemyet all macromodels assume thisbehavioural econ has shownthat individuals aren't rationalwhy would you assume a wholemade of irrational parts is rational?no simple relationshipbetween individual andaggregate behaviournot the theory, but the waythe theory was applied thatcaused the crisismacro criticised for not capturingcomplexity of human decisionsbut that's not what macro isthere for in the first placeit's a series of simplifications which weshould use to gain insight about whatwould otherwise be intractable problemsmacro has weaknesses, butthese are way fewer than itsstrenghtspoor policy & incorrectassessment of risk by hh'sand banks to blamecurrent system has incentives forindividuals to deviate from whatmacro theory suggestsshould align private interests inbanking with public welfareDouble click this nodeto edit the textClick and drag this buttonto create a new node