Transcript Macroeconomics - Econproph on Macro

Current Challenges & Research
If something cannot go on forever, it will stop.
-- Stein's Law (Herbert Stein)
We have met the enemy and he is us.
-- comic strip character Pogo
Created:
Jan 2013
by Jim Luke.
Classical Theory
Assumptions:
Predictions:
• Competitive markets
• Quick adjustment to
equilibrium
• Say’s Law
• Self-regulating economy
• Short recessions / inflations
• Inflation OR recession
Rx:
Problems:
• Small govt, balanced
budget
• Laissez faire
• Supply-side focus
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Big business & big govt
Public goods/externalities
Expectations & AD
Fiat money
Poor Empirical track record
Keynesian Theory
Assumptions:
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Monopolistic markets
Sticky prices/wages
“Animal Spirits” Expectations
Financial and asset markets
especially prone to crises and
boom-bust cycles without ‘real’
economic reasons
Rx:
Predictions:
• Mild recessions / inflations if
recommendations followed
• Deep, long depressions if
recommendations NOT followed
• Inflation OR recession
• Govt manages macroeconomic
conditions
• Counter-cyclical fiscal policy
• Monetary policy to lower interest Problems:
rates
• Practicality:
• Not effective in liquidity trap
• Lag times on policy
• Balanced budget over cycle
• Size of response
• Demand-side focus
Monetarist Theory (QTM)
Assumptions:
Predictions:
• Competitive markets
• Can measure money &
inflation
• Velocity is stable
• Central bank manages recessions
/ inflations
• Excess money growth = inflation
• Low interest rates = growth
Rx:
• Constant money growth
• “Wise” central bank
Problems:
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Liquidity trap
Bubbles
Open economy
Unstable velocity
Bias toward inflation-fighting,
tends to ignore unemployment
• Limited “real” impact
Heterodox Theories (Post-Keynesian, MMT)
Similar to Keynesian Theory but with:
• Industrial and financial capitalism tends to be unstable
• Financial and banking crises are an inherent feature of
capitalism
• Government fiscal policy and strict financial regulation
is needed
• Fiat money systems as actually practiced
Rx:
• Aggressive fiscal policy to assure full employment
• Increase deficits until full employment achieved
• Monetary policy should accommodate fiscal policy
• Strict financial and banking regulation to avoid crises
Policy Challenges Today
 Austerity and deficit-cutting or fight unemployment?
 Limits or goals of monetary policy
 Regulation of banking to prevent crises
 Distribution of income