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| Author: | Stiglitz, J.E. |
| Title: | Rethinking macroeconomics: what failed and how to repair it |
| Journal: | Journal of the European Economic Association
2011 : AUG, VOL. 9:4, p. 591-645 |
| Index terms: | macroeconomics econometric models financial crises equilibrium theory inflation economic policy |
| Language: | eng |
| Abstract: | The standard macroeconomic models have failed, by all the most major tests of scientific theory: they did not predict the happening of the financial crisis; and when it happened, they underestimated its effects. Monetary authorities let bubbles grow and focused on low inflation, partly because the standard models highlighted low inflation as necessary and almost sufficient for efficiency and growth. After the break of the crisis, policymakers relying on the models floundered. Notwithstanding the diversity of macroeconomics, these failures point to the need for a fundamental model re-examination - and a reassertion of the lessons of modern general equilibrium theory, seemingly forgotten in the years prior to the crisis. This paper broadly portrays the failures of the standard models, and then outlines the economics of deep downturns, and shows such downturns being endogenous. Further, the paper argues that systemic changes have occurred to the economic structure that made it more vulnerable to crisis, contrary the standard models' implications. Finally, the paper compares the policy implications of our framework with those of the standard models. |
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