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J.W Mason

Perhaps the three central questions of macroeconomics are: What drives fluctuations in employment and output? What is the relationship between the short run of business cycles and the long run of growth? And what policy tools are needed to overcome the instabilities to which capitalist economies are subject? The behaviour of the U.S. economy in the decade since 2008 is informative for all three questions. The U.S. experience suggests that, first, consistent with Keynesian theory, short-run variation in employment and output is dominated by aggregate demand and not by technological or other ‘structural’ factors. Second, less comfortably for heterodox as well as mainstream macroeconomists, the distinction between a demand-determined ‘short run’ and fundamentals-determined ‘long run’ appears less viable. Third, the pre-2008 consensus that setting the central bank-controlled overnight interest rate to the appropriate level is sufficient to keep output and employment near their desired levels has become harder to defend. Going forward, macroeconomic policy is likely to rely on a broader toolkit and a more eclectic theoretical framework.