Friday, August 26, 2011

Stiglitz Gets a Laugh at the Idea that Macroeconomics is in Its Golden Age

Here is a lecture by George Stiglitz with the title "Imagining an Economics tthat Works: Crisis, Contagion and the Need for a New Paradigm" at the 2011 meeting of The Lindau Nobel Laureate Meetings at Lindau. He savages the state of macroeconomics: the fact that the 2008 economic collapse was not foreseen and has given no useful guidance in how to extract the world economy from the crisis:

Here is the abstract for this lecture:
The standard macroeconomic models have failed, by all the most important tests of scientific theory. They did not predict that the financial crisis would happen; and when it did, they understated its effects. Monetary authorities allowed bubbles to grow and focused on keeping inflation low, partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth. Advocates of capital market liberalization argued that it would lead to greater stability: countries faced with a negative shock borrow from the rest of the world, allowing cross-country smoothing. The crisis showed the deep flaws in this thinking, but policymakers have been slow to rethink the paradigms they relied on. There is a need for a fundamental re-examination of the models. This lecture first describes the failures of the standard models in broad terms, and then develops the economics of deep downturns, and shows that such downturns are endogenous. Further, the lecture will argue that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued. In particular, the lecture will explore how integration can exacerbate contagion; and how a failure in one country can more easily spread to others. There are conditions under which such adverse effects overwhelm the putative positive effects. Finally, the lecture will contrast the policy implications of our framework with those of the standard models; for instance, how capital controls can be welfare enhancing, reducing the risk of adverse effects from contagion.

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