Standard Macroeconomics Research Articles

Justice Matters: Equality-Efficiency Tradeoff in Principles of Macroeconomics

Students who are trained in standard macroeconomics often prioritize economic efficiency over other values, such as justice. Most of them believe that to achieve higher efficiency, a society needs to sacrifice economic justice. In other words, there exists a tradeoff between equality and efficiency. In my Principles of Macroeconomics class, I therefore create lectures and assignments including self-reflections and group discussions to persuade students to question the value of economic efficiency and justice. The assignments raise the awareness of students about economic justice as another essential value in society. The goal is to encourage students to rethink macroeconomic policies critically, reevaluate their moral biases, and cultivate their moral compass when dealing with ethical dilemmas. JEL Classification: A22, B0, D63, E0

Leijonhufvud on New Keynesian Economics and the economics of Keynes

Abstract The theme that Axel Leijonhufvud has extracted from the economics of Keynes is the potential for failures in the intertemporal coordination of activities in complex market systems. In his path-breaking book of 1968, he attacked standard Keynesian Economics for its view on frictions, which reduces the causes of macroeconomic pathologies to nominal rigidities. With the rise of DSGE-based New Keynesian Economics, Leijonhufvud has pointed out that ‘standard macroeconomics’ is still stuck in the frictions view. Referring to recent financial crises, he considers DSGE modelling to be hopelessly inadequate for dealing with such macroeconomic instability. Yet, the financial frictions literature in New Keynesian Economics claims to have found ways to incorporate financial crises into DSGE frameworks. The article describes continuity and change in Leijonhufvud’s critique of Old and New Keynesians, and assesses contrary claims to progress made in the DSGE world.

What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years

This article explores the development of Keynesian macroeconomics in its early years, and especially in the Big Bang period immediately after the publication of The General Theory. In this period, as standard macroeconomics evolved into the “Keynesian-neoclassical synthesis,” its promoters discarded many of the insights of The General Theory. The paradigm that was adopted had some advantages. But its simplifications have had serious consequences—including immense regulatory inertia in response to massive changes in the financial system and unnecessarily narrow application of accelerationist considerations (regarding inflation expectations).

How can we restore the generality of the General Theory?

AbstractIn this paper, I tackle the key issue raised by Pasinetti, namely why Keynes failed to accomplish his revolution and build a unifying ‘monetary theory of production’ framework. I argue that this occurred because, following his Marshallian background, he adopted an oversimplified view of the structure of theories, a problem which, following Leontief, might be labelled as ‘implicit theorising’ (IT). By making a comparison between the General Theory and standard macroeconomics based on Lakatos’s ‘research programme’ notion, this paper explores IT in a systematic fashion and stresses two key points. First, Keynes did not attack the ‘true’ orthodox postulates but only the conclusions deriving from them. Secondly, he failed to articulate his own research programme effectively. Based on these points, the paper concludes that filling such gaps in Keynes’s theory is the precondition for restoring his generality claim.

Anticipatory Monetary Policy and the Price Puzzle

Vector Autoregressions often find that inflation increases in response to a tightening in monetary policy, although standard macroeconomics predicts the opposite. This ‘price puzzle’ is commonly thought to reflect interest rates being tightened in anticipation of future inflation, reflecting information possessed by policy-makers beyond that contained in the model. Romer and Romer (2004) and Cloyne and Hurtgen (2016) successfully remove the price puzzle from US and UK data respectively by purging the cash rate of systematic policy responses to central bank forecasts. We find that this approach does not work for Australia under a wide range of specifications. This suggests that VARs may not be the most reliable way to analyse monetary policy.

Agent based-stock flow consistent macroeconomics: Towards a benchmark model

The paper moves from a discussion of the challenges posed by the crisis to standard macroeconomics and the solutions adopted within the DSGE community. Although several recent improvements have enhanced the realism of standard models, we argue that major drawbacks still undermine their reliability. In particular, DSGE models still fail to recognize the complex adaptive nature of economic systems, and the implications of money endogeneity. The paper argues that a coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy should be a pivotal feature of every macroeconomic model and proposes a macroeconomic framework based on the combination of the Agent Based and Stock Flow Consistent approaches. The papers aims at contributing to the nascent AB-SFC literature under two fundamental respects: first, we develop a fully decentralized AB-SFC model with several innovative features, and we thoroughly validate it in order to check whether the model is a good candidate for policy analysis applications. Results suggest that the properties of the model match many empirical regularities, ranking among the best performers in the related literature, and that these properties are robust across different parameterizations. Second, the paper has also a methodological purpose in that we try to provide a set or rules and tools to build, calibrate, validate, and display AB-SFC models.

A first formal approach to animal spirits beyond uncertainty

Standard Macroeconomics treats animal spirits as a source of uncertainty disturbing otherwise rational expectations. But, Keynesian animal spirits ensue from suboptimal emotional responses to socioeconomic status change beyond matters of uncertainty. This paper identifies such spirits with the disturbance from the optimal decision-making implied by an emotional well-being utility function. The introduction of a policy-maker, holding its own view of private welfare in a society of emotional individuals, generates by itself, i.e. in the absence of animal spirits, uniform business fluctuations. This is the result of the income redistribution needed to reconcile the policy-maker’s with the emotional individual’s view of private welfare. Consequently, if animal-spirits induced fluctuations are already present when a policy-maker is introduced in the economy, the aim of policy intervention should be the design of that income redistribution that would not aggravate the business cycle but that would end up in uniform only cycles, with the aid perhaps of discretionary interest rate policy. Nevertheless, if animal spirits do not exist when the policy-maker enters the system, the income-redistribution induced cycles may incite such spirits by themselves in which case the cycles will not be of the uniform type. All comes down to “income and emotion”, to an ageless and ecumenical fact of life, complicated purposefully or not by authority.

Agent Based-Stock Flow Consistent Macroeconomics: Towards a Benchmark Model

The global financial crisis has forced standard macroeconomics to re-examine the plausibility of its assumptions and the adequacy of the policy prescriptions flowing from those assumptions. We believe a renewal of macroeconomic thinking and macroeconomic modeling is possible by recognizing that our economies should be analyzed as complex adaptive systems. A coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy is vital as well. We propose a macroeconomic framework based on a novel combination of the Agent Based and Stock Flow Consistent approaches. This paper presents a benchmark model for this innovative approach. Our model depicts an economy with capital and credit in which different types of agents locally interact on different markets. We provide a detailed representation of individual agents’ balance sheets, ensuring the model accounting consistency at the micro, meso, and macro levels. We analyze the properties of our simulated economy under different configurations of agent heuristics, focusing in particular on the role of credit and investment. We explain in detail the logic followed to calibrate and validate the model. Results show that our benchmark model is able to reproduce many stylized facts observed in real world, thus representing a good starting point to test -- in the next works -- different economic policies and institutional setups. Finally, the relatively simple and flexible structure of the model opens up many possibilities for development of the framework along different lines, thus providing a fertile soil for new applications.

Evolutionary Political Economy in Crisis Mode

Summary This paper sets out to discuss recent economic developments from a twofold perspective. Both spotlights focus on the special role played by the current deep global crisis. The first line of argument centers on the history of economic ideas and shows how evolutionary economics has emerged as a promising alternative to mainstream neoclassical thought as well as to traditional Keynesian macroeconomics. The failure of standard macroeconomics to inform economic policy in the current situation shows that arguments of evolutionary political economists - from Malthus via Schumpeter to contemporary scholars - can and should substitute these inadequate models. The second part of the paper takes the argument for evolutionary political economy to a methodological level: The deep crisis of economic theory is necessarily also a crisis of the methodological apparatus used. Though evolutionary economics does not provide a welldefined alternative set of methods yet, it nevertheless seems to be the best foundation to build such a new combination, a methodological innovation, out of some of the most recent advances in formalization. These latter elements are briefly sketched.

The Role of Economics in Canadian Undergraduate Business Education

The authors analyzed curricula from all 61 Canadian undergraduate business programs and found that business schools that contain economics departments, business schools with higher mathematics and statistics requirements, and business schools that have received Association to Advance Collegiate Schools of Business accreditation are more likely to require additional economics courses beyond the standard introductory level microeconomics and macroeconomics. Among those schools that require one or more additional economics courses, managerial economics is the preferred requirement. The authors also found that many specialized business programs, such as human resources, finance, and international management, include either required or optional economics courses beyond those already required in the school's general business degree program. Based on the findings, the authors make recommendations for business school curriculum development.

Is the Fundamental Science of Macroeconomics Sound?

Recently, Ben Bernanke has argued that in the events leading up to the financial crisis, mistakes were made, but they were primarily engineering or management mistakes, not mistakes in the fundamental science of macroeconomics, which he sees as sound. This paper argues that Bernanke is wrong and that standard macroeconomics has not recognized, and still does not recognize, the limits of science and of formal modeling when studying something as complex as the macro economy. This failure to recognize, and adequately convey to policy makers, the limits of our scientific understanding of the macro economy, has led standard macroeconomics to combine fundamental science and policy applications in ways that undermine both. This paper advocates a classical methodological approach, which Keynes followed as well, that strictly separates fundamental science from policy analysis. Policy does not directly follow from models; it follows from reasoned analysis which uses models, but which combines models with institutional knowledge, intuition, and common sense. JEL classification: A11, B22, E0, E60

Should the financial crisis inspire normative revision?

The paper evaluates the claim, made by a range of commentators but most prominently by Akerlof and Shiller in Animal Spirits, that the recent financial crisis illustrates gaps in the normative picture incorporated into standard macroeconomics that are plugged by insights due to behavioral economics. It is argued that Akerlof and Shiller's contention that we cannot understand what happened unless we supplement macroeconomic theory with social-psychological theory is convincing only after being so heavily qualified that most of the surface excitement drains out of it. However, this is argued to be compatible with the idea that each recession or depression is a unique historical episode from which specific lessons can be learned; rejection of calls for paradigm shifts does not imply that each business cycle merely offers another observation to confirm a settled and stable understanding of macroeconomic dynamics. Discussion of factors that made the recent crisis unusually dangerous – the extreme global savings imbalance and the very rapid shifts occurring in the composition of the global labor force – leads to identification of a quite specific normative recommendation. This recommendation, that wealthy and middle-income people who care about efficiency, growth and prosperity should be willing to be taxed at higher levels to fund investments in human capital development, is certainly far from novel. However, I contend that the recent events have provided a new and newly specific reason to urge it. The reasoning in question owes nothing to behavioral economics or to any new advances in empirical psychology, which are indeed argued to obscure the most important implications of the recent crisis, and of recessions in general.

Japan's Lost Decade: What Have We Learned and Where Are We Heading?*

The lost decade has provided us a number of lessons. One of them is the limit of standard macroeconomics. This paper attempts to show that uncertainty plays a much more important role in the macroeconomy than most economists recognize. Once the economy is caught in an uncertainty trap, the effectiveness of standard policy necessarily weakens. The zero‐interest rate may well be a consequence of an uncertainty trap. In fact, whether or not the economy is caught in such an uncertainty trap distinguishes “depression” from the normal cyclical “recession.” The significance of demand‐creating innovation is another point I emphasize in this paper. In my view, a lack of demand‐creating innovation is a part of explanation of the lost decade. At the same time, this paper offers prospects for the future of the Japanese economy.

Několik poznámek k významu výuky dějin ekonomických teorií pro studenty VŠE v Praze

Stať se zamýsli nad významem znalosti historie ekonomických teorii pro studenty VSE v Praze v době, kdy kurzy standardni mikroekonomicke a makroekonomicke teorie představuji jednu z hlavnich soucasti výuky mladých ekonomů. Dějiny ekonomických teorii (dale jen DET) byly vyucovany na ceských vysokých skolach ekonomickeho zaměřeni od roku 1945. Na pocatku tohoto obdobi byly DET orientovany předevsim na kritiku vybraných nemarxistických ekonomických teorii, předevsim rakouske skoly, ale postupem casu byla kritika nahrazovana pozitivnim výkladem vývoje ekonomicke teorie. V roce 1993 byly DET poněkud nesťastnou shodou okolnosti vyřazeny z povinneho spolecneho zakladu výuky na VSE. Uznani významu znalosti historie ekonomických teorii vedlo v souvislosti s přechodem na evropský kreditni system k tomu, že byl do spolecneho zakladu na bakalařskem stupni studia zaveden nový předmět pod nazvem hospodařske dějiny, jehož soucasti jsou take DET.

Complex dynamics and empirical evidence

Standard macroeconomics, based on a reductionist approach centered on the representative agent, is badly equipped to explain the empirical evidence where heterogeneity and industrial dynamics are the rule. In this paper we show that a simple agent-based model of heterogeneous financially fragile agents is able to replicate a large number of scaling type stylized facts with a remarkable degree of statistical precision.

A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility

In this paper, we discuss a scaling approach to business fluctuations. Our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to (re)discover a set of stylized facts which have to be satisfactorily accounted for in their models. Standard macroeconomics, based on a reductionist approach centered on the representative agent, is definitely badly equipped for this task. On the contrary, we show that a simple financial fragility agent-based model, based on complex interactions of heterogeneous agents, is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision.

Is ex‐ante ex‐post analysis irrelevant to Keynes's theory of employment?

Ex‐ante ex‐post analysis has become a standard tool in macroeconomics. Yet Keynes dismissed it. We argue that Keynes's dismissal of ex‐ante ex‐post analysis is not an oddity but an indication of the originality of his theory of employment compared to standard macroeconomics. First, the principle of effective demand does not amount to a process that determines employment and income at the point of intersection of the traditionally defined ex ante supply and demand functions. Second, the finance motive allowed Keynes to confirm the identity of aggregate supply and demand already asserted in The General Theory. This latter conclusion is puzzling, however, since the principle of effective demand presupposes the possibility of a discrepancy between supply and demand. We suggest that Keynes's theory of employment is linked to a theory of income distribution whereby profits are a redistributed share of factor income which is transferred to firms when prices exceed factor costs. The identity and the equilibrium condition then relate to separate measurements of income and output, factor cost and prices.

Complex Dynamics and Empirical Evidence

Standard macroeconomics, based on a reductionist approach centered on the representative agent, is badly equipped to explain the empirical evidence where heterogeneity and industrial dynamics are the rule. In this paper we show that a simple agent-based model of heterogeneous financially fragile agents is able to replicate a large number of scaling type stylized facts with a remarkable degree of statistical precision.

Toward a Feminist Expansion of Macroeconomics: Money Matters1

Orthodox economics has long been confident that money is of minor importance in life. From Adam Smith onward, we have heard that it is real goods, not money, that determine well-being and that economic scarcity refers to scarce goods and scarce real resources. Though values are expressed in money terms, and money facilitates the circulation of goods, many economists continue to believe that it is both nominal and neutral in exchange relationships. In standard microeconomics, now dominated by the barter models of Walrasian general equilibrium, money plays no role whatever [Minsky 1990]. It is simply a mathematical convenience for avoiding the price permutations of barter. In standard macroeconomics, now dominated by monetarism, the situation is largely similar. Monetarists assert either that money does not matter or that it is all that matters. This reflects the Walrasian foundations of current monetarism: under normal circumstances, money is irrelevant [Minsky 1990]; but, in the closed and timeless Walrasian hermeneutic, nothing ever happens except when the essentially alien force of money is interjected. Orthodox Keynesianism, now in retreat, does include exogenous money as an variable, but it neglects Keynes's [1936] preeminent concern with monetary factors in business cycles.

On the Design and Use of Forecasting Experiments in Teaching Macroeconomics

This article explores the use of PC econometric forecasting experiments in teaching intermediate macroeconomics. Emphasis is placed on the methodological and pedagogical aspects of these experiments. Each experiment is designed to help students better understand difficult and challenging aspects of standard macroeconomics. It is hoped that these experiments will stimulate new thinking on how computer applications can help instructors to better teach abstract and analytical subject matter not only in economics but in all disciplines.