A Balanced Debate About Reforming Macroeconomics

Joseph Stiglizt
HuffPost

The most remarkable aspect of the recent conference at the IMF on Macro and Growth Policies in the Wake of the Crisis was the broad consensus that the macroeconomic models that had been relied upon in the past and had informed major aspects of monetary and macro-policy had failed. They failed to predict the crisis; standard models even said bubbles couldn't exist -- markets were efficient.

Even after the bubble broke, they said the effects would be contained. Even after it was clear that the effects were not "contained," they provided limited guidance on how the economy should respond. Maintaining low and stable inflation did not ensure real economic stability. The crisis was "man-made." While in standard models, shocks were exogenous, here, they were endogenous.

There was even remarkable consensus about many elements of policy in responding to the crisis: fiscal policy can work; we need to be wary of empirical studies based on circumstances markedly different from the current situation (where households are overleveraged, where interest rates have reached the zero lower bound, etc.).

There were large areas of consensus for the longer run: central banks will focus on more than just inflation, especially financial stability; but there will be a real challenge in developing an integrated approach.

(More here.)