The current state of macroeconomics: A view from the textbooks

Abstract

Current macroeconomic research reflects substantial controversy concerning the choice of both paradigm and technique. The advent of the rational expectations hypothesis accompanied by the Lucas critique has led to a restructuring of macroeconomic models in a search for a consistent explanation of aggregate fluctuations. The current approach is to establish ‘microfoundations’ based on optimizin g behavior by individual agents. It has become commonplace to openly criticize the IS/LM framework as a poorly specified model that lacks serious scientific content. In addition, the Keynesian notion of fixed nominal wages meets with disapproval from the new Classical economists. Nevertheless, with few exceptions,’ analysis of demand-side equilibrium in intermediate textbook treatments remains dominated by the use of the IS/LM model. Moreover, many of the surrent texts retain the assumption of some degree of wage rigidity to rationalize the existence of non-neutralities in the system. The purpose of this review is to examine the current state of macroeconomic theory in the context of the material that the profession views as appropriate for undergraduate students at the intermediate level. To identify this material, I focus primarily on the coverage in three texts: Dombusch and Fischer (1984), hereafter referred to as D&F, Gordon (1984) and Parkin (1984). Virtually all authors of intermediate texts have undertaken the natural process of modifying the analysis to reflect recent developments in the research literature. One widely adopted change has been to expand the discussion of labor market behavior and aggregate supply. Analysis of the implications of rational expectations, labor market contracts, supply-side shifts and the effectiveness of policy has been either added or expanded. The discussion of growth theory, which had diminished somewhat during the 1970’s, has become