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:
New Keynesian theory, the go-to model in modern macroeconomics, is a quagmire of seemingly insoluble puzzles. Readers of this Blog know that much of the difficulty is rooted in the New Neoclassical Synthesis, the academy’s governing directive for acceptable research. In particular, the NNS mandates use of friction-augmented general market equilibrium, which produces much more mild recessions than consistent with the evidence. The best-known NK shortcoming is the employment-volatility puzzle: FGME modeling generates much smaller increases in joblessness in cyclical downturns than does the real world. Additional business-cycle characteristics that escape the analytic grasp of NNS theorists include meaningful wage rigidity, involuntary job and income loss, chronic wage rents that motivate unemployment persistence, chronic market inefficiency, money non-neutrality sufficient to justify discretionary management of total nominal spending, an evidence-consistent trade-off between unemployment and inflation, extreme instability and depression rooted in rational behavior, rational-behavior stagflation, and more. Simply put, the mainstream NNS framework does an embarrassingly shoddy job of explaining policy-relevant features of business cycles.
This post’s selective look at unresolved mainstream puzzles considers the adverse employment and production fluctuations generated in the FGME model class, concluding it can never produce policy-relevant instability. At the heart of that problem are inherent limitations of NK search/match modeling that is almost always used in FGME analysis to provide behavioral content to labor-market behavior.
Mainstream job-loss modeling. NK research on downward nominal wage rigidity, a necessary condition of involuntary job loss, is fatally focused on identifying one or more market frictions that rationally suppress labor-price recontracting. Decades of failure indicate that the hoped-for super friction does not exist. Illustrative of that continuum of disappointment is the relatively recent attempt by Blanchard and Gali (2010 )to come up with a plausible super friction.
Blanchard-Gali’s fate is sealed with their assignment of a central role to the familiar labor wedge, asserting that market frictions induce a wage band within which any real labor price is consistent with private efficiency: MRS≤W≤MPL. MRS denotes...