Most Embarrassing Question

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Each and every practicing macroeconomist must answer an embarrassing question. Why did mainstream theory fail, utterly, to be useful to stabilization authorities in the extreme instability of 2008-09? Readers may believe that the GEM Blog has already hammered home the … 
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Third Fundamental Neoclassical Tenet

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This post will be the last to begin the Hunt-Lautzenheiser (2011, p.434) summary of the three fundamental tenets of textbook neoclassical theory: “… the faith that the invisible hand of the competitive market harmonizes all interests through free exchange, creates … 
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Second Fundamental Neoclassical Tenet

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Begin with a reiteration, from last week, of E.K. Hunt and Mark Lautzenheiser’s (2011, p.434) summary of the three fundamental tenets of neoclassical theory: “… the faith that the invisible hand of the competitive market harmonizes all interests through free … 
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First Fundamental Neoclassical Tenet

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E.K. Hunt and Mark Lautzenheiser (2011, p.434) nicely capture three fundamental tenets of mainstream neoclassical theory: “… the faith that the invisible hand of the competitive market harmonizes all interests through free exchange, creates rational prices, and leads to an … 
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Central Banks’ Inflation Objective

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The cornerstone of mainstream macroeconomists’ advice on monetary policy is the first and foremost emphasis on low, stable inflation. Full employment, if considered at all, is explicitly secondary. That guidance is dead wrong. The only specification of stabilization objectives that … 
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Zero-Bound Interest Rates

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This week’s post wraps us our three weeks of attention to the New Keynesian thinking of Michael Woodford, this time examining monetary-policy recommendations he has made to help manage the extreme instability that characterized the Great Recession. The exercise demonstrates, … 
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Woodford’s Unanswered Questions

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Last week’s post cited Michael Woodford. He has long exercised outsized influence on New Keynesian macroeconomics. His status was captured in a conversation I had at a Fed dinner a few years after the publication of Woodford’s Interest and Prices: … 
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Two Keynesians, One Early, One New

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My former colleague at MIT, the late Franco Modigliani (1977) forcefully asserted that the economy “needs to be stabilized, can be stabilized, and therefore should be stabilized by appropriate monetary and fiscal policies.” As a charter member of the Early … 
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Foxhole Keynesians

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Edward Prescott once derided monetary easing as no more “effective in bringing prosperity as rain dancing is in bringing rain”. He is, of course, correct if the monetary stimulus is conducted within the mainstream micro-coherent, market-centric, general-equilibrium model class. By … 
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Bob Hall’s Open Kimono

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Bob Hall’s Brookings Papers article, “How Much Do We Understand about the Modern Recession” (2:2007) is must read for all macroeconomists. The recommendation is not because readers will learn much about the nature modern recessions. They won’t. His description of … 
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