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  More on Complex and Problematic Fluctuations

  By James Annable | Sep 20, 2019

  There is something suspicious about Evolution or Revolution? (2019) that is shared by the earlier entries in the academy’s annual series on macro theory after the Great Recession. Few of the contributing authors explicitly use the mainstream market-centric DSGE model class to explain evidence produced by the 2008-09 extreme instability. They know that the model they use to instruct graduate students cannot handle that really important task.

  Looking for someone with confidence in mainstream macroeconomics, this post turns to Robert Hall who is known to be a bold New Keynesian. My former M.I.T. colleague is not afraid to use what he teaches to explain significant evidence. Almost by default, Hall provides insight into the capacity of rigorous New Keynesianism to make sense out of the extraordinarily damaging macro crisis, including its lead-up, contraction, and aftermath. What follows draws upon three of the prolific theorist’s relevant publications:

  • “How Much Do We Understand about the Modern Recessions?” Brookings Papers on Economic Activity (2007), in which he describes the implications of the NK macro model for the evolving nature of recessions;
  • “Why Does the Economy Fall to Pieces after a Financial Crisis,” Journal of Economic Perspectives (2010) that uses the mainstream NK thinking to work through the causes of the Great Recession; an In addition to his recent
  • “Macroeconomics of Persistent Slumps,” Chapter 27 of the 2016 Handbook of Macroeconomics.

  New Keynesian Recessions

  Prior to the 2008-09 extreme instability, Hall wrote a series of papers that separated U.S. recessions into two chronological classes. He asserts a metamorphosis, largely unspecified, of cyclical downturns into their “modern” form some time after the severe 1981-82 contraction. From Hall: “In the modern U.S. economy, recessions do not begin with a burst of layoffs. Unemployment rises because jobs are hard to find, not because an unusual number of people are thrown into unemployment.” Hall’s “modern” recessions are consistent with mainstream New Keynesian theory. NK downturns that cannot accommodate neither meaningful wage rigidity (MWR) nor...

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