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:
Heterogeneous Demand Disturbances
In generalized-exchange macroeconomics, featuring microfounded meaningful wage rigidity and the rational suppression of labor-price recontracting, a broad variety of adverse shocks are centrally promulgated by nominal demand disturbances (DD). Stationary demand disturbances are the most common DD class. SDD are associated with garden-variety business cycles. They are inherently self-correcting, helped along by automatic stabilizers augmented by central-bank “lean-against-the-wind” intervention.
The second propagation category, much less frequent but extraordinarily costly and important, is nonstationary demand disturbances. NDD features contracting total spending that overwhelms automatic stabilizers and orthodox central-bank intervention. If not contravened, extreme instability induces collapsing asset prices, output, and profits, rapidly cumulating forced job and income loss, impaired lending by and funding for financial institutions, debt default, nominal wealth destruction, gathering price deflation, and cataclysmic depression. Given NDD, prevention of depression requires very aggressive and broadly targeted total-spending management.
The stabilization theory that follows builds on fundamental demand-disturbance heterogeneity. It draws on contributions by Roger Farmer, Nancy Stokey, Eugene Fama, and the GEM Project.
Confidence. Farmer (2010b, p.18) revives the argument that confidence exerts a “separate, independent” influence on spending behavior. His specific contribution is that investor/lender confidence is rooted in a positive feedback relationship with mark-to-market financial asset prices and, as a result, is most effectively calibrated as an increasing, nonlinear function of those prices. In short, Farmer posits asset prices to be an effective proxy for the varied determinants of investor/lender confidence that have been identified in market behavior. This is not a new idea. The intertwined reduced-form nature of the stock market and overall confidence has been noted by many economists. From Alan Greenspan (2009) during the worst of the Great Recession: “… a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major...