A home for economists who believe macroeconomics can be both coherent and stabilization-policy relevant
The GEM website is a home for economists who believe that mainstream macroeconomics cannot usefully explain the costly instability that periodically rocks modern economies.
In particular, consensus thinking failed to guide policymakers' efforts to deal with the enormous welfare costs of the 2007-09 Great Recession – especially six million involuntarily lost jobs.
That failure is not surprising. Forced unemployment is beyond the reach of coherent market-centric theory that today dominates macro research.
The GEM Project offers an alternative approach that intuitively explains instability while maintaining both coherence and stabilization-relevance. In its central innovation, the Project generalizes rational exchange from the marketplace to the large-firm workplace, crucially microfounding meaningful wage rigidities – the key to policy-useful modeling.
Generalization of price-mediated exchange is offered as the next big idea in macroeconomics. We invite economists dissatisfied with the stabilization-policy limitations of mainstream theory to join us in constructing a better model.
The interactive GEM website provides a variety of ways to contribute:
We know that mainstream macro theory, rooted in friction-augmented market-centric general equilibrium, cannot accommodate meaningful wage rigidity. We know that MWR is defined by its capacity to rationally suppress wage recontracting. We know that the absence of MWR mandates the rational nonexistence of involuntary job loss and recognizably sized employment and output responses to nominal-demand disturbances.
We also know the bottom line. New Keynesians (NK), who have dominated macroeconomics for decades, are in a pickle. They own the inadequate market-centric analysis. Moreover, they have doubled-down on their bad bet by insisting that their model is fundamentally finished theory. There is no need for additional research on its micro foundations. Published work of the mainstream academy has long emphasized “perfecting” its core model, identifying market frictions and diverting attention from its inherent stabilization irrelevance. The most frequently used shiny object has been the ubiquitous attempt to use textbook labor-market search/match theory to explain cyclical unemployment.
Mainstream stabilization uselessness has forced a generation of macro theorists, who have been trained in the NK market-centric general-equilibrium canon, to have a high tolerance for hypocrisy and embarrassment. This post looks at an illustrative unhappy episode for Jordi Gali, a prominent member of the lost generation featured in last week’s post.
The new generation of NK theorists, both ambitious and idealistic, wants to attack the market-centric general-equilibrium model class’s stabilization irrelevance, most notably its inability to accommodate evidence-consistent employment and output responses to weakening nominal demand. That effort has been limited to three research strategies. First, they have sought to identify a rational market friction that microfounds MWR, which the good ones figure out is a necessary condition of causality from nominal demand disturbances to evidence-consistent forced layoffs and associated production cuts. Unfortunately, they discover what older Keynesians learned before them. The rational suppression of wage recontracting cannot occur in the neoclassical marketplace. The crucial market super friction capable of rationally suppressing wage recontracting simply does not exist.