Macroeconomic Lessons from the Great Deviation

Abstract

Congratulations to the National Bureau of Economic Research on the twenty-fifth anniversary of the Macroeconomics Annual conference series, and thanks to all the editors over the years—Stanley Fischer, Olivier Blanchard, Julio Rotemberg, Ben Bernanke, Daron Acemoglu, Kenneth Rogoff, and Michael Woodford—who have consistently encouraged research with a strong empirical content and policy relevance. My remarks tonight focus on the macroeconomic aspects of the financial crisis. Most of my research over the past few years has been on the financial crisis. My approach has been empirical, examining data on interest rate spreads, money supply, consumption, and investment and simulating empirical models using the discipline of counterfactuals— basically the same approach used in the papers presented at the NBER Macroeconomics Annual conferences over the years. In these remarks I want to summarize the key findings in a few words, without the charts or tables, and then draw the implications both for macroeconomics as a field and for macroeconomics as a guide for policy. Since this is a Macroeconomics Annual meeting, I will focus on macroeconomic issues and not delve into regulatory issues. Let me begin with an explanation of the title of my talk. I know economists use the word “great” too much, but I think it is quite fitting here. We all know what the Great Moderation was, and we have debated what caused it. Many have argued that good policy, especially good monetary policy, played a big role. And we all know what the Great Recession was and that it marked the end of the Great Moderation. You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules based, and less predictable. It is a period during which policy deviated from the practice of at least the previous 2 decades and from the recommendations of most macroeconomic theory