Two weeks ago the GEM Blog took Olivier Blanchard to the woodshed for his assessment (in 2008) that the state of NK macroeconomics is “good”. A week ago, it went into some detail about the extraordinarily wrong-turn guidance from supposedly …
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So Many Wrong Turns
This post extends last week’s essay, using the troubles of mainstream macroeconomics to illustrate a message of the GEM Project: Rational-behavior theory must replace the modern dependence both on assumptions of convenience and on models that are “patently false” (Blanchard’s …
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“The State of Macro Is Good”
The quote is from Olivier Blanchard in August 2008, at the beginning of the extreme instability that nearly tipped global economies into depression. His full statement is: “After the explosion (in both the positive and negative meaning of the word) …
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New Keynesians on Business Cycles, Part II
Nowhere does the absence of microfounded meaningful wage rigidity (MWR) do more damage than in the analysis of business cycles. The evidence from modern model-building research is conclusive. Stabilization-relevant rational-behavior macroeconomics without MWR cannot be done. Yet NK theorists continue …
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More on the Fed’s Zero-Bound Problem
The Fed is mulling over a new approach to its zero-bound problem. A Wall Street Journal story by Nick Timiraos (“Yield Caps on Table in Next Recession”, January 27, 2020) uses historical context to describe the policy tool under consideration: …
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New Keynesians Explain Cyclical Unemployment
Last week’s post on unemployment provides context for today’s essay. In it, we return to a fundamental message of the GEM Project: The absence of microfounded meaningful wage rigidity deprives NK model-builders of crucial guidance in their attempts to be …
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Understanding Involuntary Unemployment
Last week’s post mused about how generalized-exchange modeling, had it been available and recognized, would have fundamentally altered Robert Barro’s career. Most significantly, his work with Hershel Grossman on “fixed-wage general-equilibrium” would have been credited with insightfully microfounding Keynesian income-driven …
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Robert Barro and His Nobel
In the most important contribution to the fixed-wage general-equilibrium (FWGE) literature, Robert Barro and Herschel Grossman (1971), hereafter B&G, posit nominal wage rigidity in order to investigate the interdependence of rationing in the labor and goods markets. Such analysis must …
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Proper Theorist Behavior
“Like any good [theory], it provides an explanation for something that is previously unexplainable. Just as important, it makes predictions that can be tested.” That is from Mike Brown’s review of When the Earth Had Two Moons (2019) by Eric …
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Existence of Market-Centric General Equilibrium
This post digs more deeply into the New Keynesian market-centric general-equilibrium model class that has occupied the macro mainstream for a generation. It begins with a contribution that ranks among the greatest in the history of economics. In it, Arrow …
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