What’s Right with Macroeconomics?

What’s Right with Macroeconomics?

The Cournot Centre series

Edited by Robert M. Solow and Jean-Philippe Touffut

Global crises are very rare events. After the Great Depression and the Great Stagflation, new macroeconomic paradigms associated with a new policy regime emerged. This book addresses how some macroeconomic ideas have failed, and examines which theories researchers should preserve and develop. It questions how the field of economics – still reeling from the global financial crisis initiated in the summer of 2007 – will respond.

Chapter 4: Try again, macroeconomists

Jean- Bernard Chatelain

Subjects: economics and finance, methodology of economics

Extract

The world financial and economic crisis that broke out in the summer of 2007 has sparked ground-breaking thinking in the field of macroeconomics and finance. The purpose of this chapter is to assess where most macroeconomists are in relation to those ideas. I will begin with a description of the conditions that led to a great reversal of weakly regulated international finance to strongly regulated international finance for the period 1945–73. These days the bargaining power of international banking is too strong to observe the same kind of trend. Weakly regulated international capital markets are likely to persist in the next decades. There is thus a high probability that the financial crisis will lead to very costly world recessions in terms of welfare. For that reason, macroeconomic theory must deal with weakly regulated international capital markets, which lead to a systematically erroneous valuation of assets (the efficient market hypothesis is not valid).

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