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:
In the most recent updating of the Handbook of Monetary Economics, Greg Mankiw and Ricardo Reis (2010, p.222) are thoroughly New Keynesian in how they frame the question of why money matters. The framing restricts, and ultimately defeats, an adequate answer: “Since the birth of business cycle theory, economists have struggled with one overarching question: What is the nature of the market imperfection, if any, that causes the economy to deviate in the short run from full employment and the optimal allocation of resources? Or, to put the question more concretely and more prosaically in terms of undergraduate macroeconomics: What friction causes the short-run aggregate supply curve to be upward sloping rather than vertical, giving a role to aggregate demand in explaining economic fluctuations?”
An adequate answer to why money matters turns out to be inconsistent with modern theorists’ consensus assumption, illustrated by Mankiw-Reis, that optimizing exchange occurs wholly in the marketplace. That universal, unexamined, and ultimately untenable belief implies that the channel through which nominal disturbances induce deviations from full employment must be rooted in one or more market frictions. The problem is that candidate frictions must confront, and are always dominated by, rational employer offers to cut wages in lieu of job loss. If the reduction does not violate employee opportunity costs, it is accepted. If it does violate opportunity costs, the worker quits; and the job separation is voluntary.
Wage recontracting provides a stonewall market-centric DSGE defense against the failure to realize gains from trade that cannot be ignored in coherent continuous-equilibrium macro modeling. Yet, it has become clear that recontracting, and consequently model coherence, must be ignored if market-centric thinking is to be stabilization-relevant. That New Keynesian conundrum plagues much of the modeling featured in the monetary-economics Handbook. Meaningful wage rigidity (MWR) is necessary for the existence of involuntary job loss but cannot itself exist in coherent market-centric DSGE thinking. (Chapter 1) The mainstream response to that macro muddle has been to...