ipl-logo

Neoclassical Macroeconomic Theory

3337 Words14 Pages

Paul Krugman once sardonically commented on how it is “hard to believe” that economists once celebrated the success of their research and the resultant policies. He wasn’t lying about the overwhelming positivity that surrounded economics less than a decade ago. Be it IMF’s Blanchard or Robert Lucas, they had all (mostly) believed that the big battles were behind them, that better policymaking, grounded in macroeconomics’ supposed phase of theoretical glory, had everything under control making depression prevention was a reality. Numbers and rhetoric substantiated these claims to a great degree and macroeconomics as an academic discipline (through the path-breaking research) and as the profession (through subsequent policy making) had been …show more content…

Firstly, the idea of conceptual reductionism or the focus on the micro-foundations of macroeconomic models lending back to the utility maximization decision of individual agents. This expresses strong predilection towards theoretical frameworks that attempt to describe the global economy in terms of an equilibrium asserting consistency in individual behaviors of different economic agents. Secondly, the rational agents assumption that further implies that economic agents have absolute understanding of macroeconomic models and can perfectly comprehend and forecast based on the information that they access, in terms of rational expectations. This assumption is especially supported by and enshrined within larger analytic models such as the Dynamic Stochastic General Equilibrium models (DSGE-models) that are now commonly used tools for policymaking. (Christiano et al., …show more content…

It is the failure of global macroeconomics, as a profession. When the crisis settled in beyond reasonable doubt, the economists, actively involved with governments across Europe, had recognized the problems with the standard models. Flagging a temporary solution is, however, an ineffective fix for a poor model as sound theoretical frameworks are pre-requisite to making empirical sense and by extension, to policymaking and regulation. Abandoning existing models and resorting to common sense policies at times of crisis is, therefore, not the solution but building models that could accommodate the crisis

Show More
Related

  • Naked Economics Chapter 7 Summary

    763 Words  | 4 Pages

    Chapter seven focuses on measuring domestic output and national income. It informs on how GDP is measured, on how to figure out Real GDP and nominal GDP. It also discusses what is considered GDP, and what is not. GDP stand for gross domestic output, which its exact definition according to the textbook, is an output as the dollar value of all final goods produced within the borders of a country, usually in a year. This is a monetary measure.

    Read More

  • Robber Barons In The Gilded Age

    203 Words  | 1 Pages

    The charge about the old days of the American economy—the nineteenth century, the “Gilded Age,” the era of the “robber barons”—was that it was always beset by a cycle of boom and bust. Whatever nice runs of expansion and opportunity that did come, they always seemed to be coupled with a pretty cataclysmic depression right around the corner. Boom and bust, boom and bust—this was the necessary pattern of the American economy in its primitive state. In the US, in the modern era, all this was smoothed out.

    Read More

  • How Did The Federal Reserve Affect The Economy Of The Late 1930's

    480 Words  | 2 Pages

    “If you want to understand geology, study earthquakes. If you want to understand the economy, study the Depression” (Ben Bernanke Quotes). Ben Bernanke, a tenured professor at Princeton University, served two terms as the Federal Reserve chairman from 2006-2014 and orchestrated the Fed’s actions during the Great Recession. Being a student of the Great Depression, Mr. Bernanke’s policies and regulations surrounding the late 2000’s crisis reflected the adaptations to the Fed’s failed actions in the 1930’s. Throughout economic history, the stability and health of our economy depends on the balance achieved by the Federal Reserve over their three major roles: Monetary Policy, Regulation, Lender of Last Resort.

    Read More

  • How Did Roosevelt's Response To Capitalism

    1274 Words  | 6 Pages

    This new common sense greatly reflected Keynesian views of the economy. Not only did this new common sense become popular in the United States, but it also became popular throughout the world. Many countries began to adopt this new common sense, especially after World War II. Globally, there was a common agreement on the belief that government intervention in the market was not a bad thing, but an essential key factor in maintaining a healthy economy. Following Keynes’s ideologies, the United States government increased the budget deficit to help other countries whose economies were destroyed by the war recover their economies.

    Read More

  • Hamilton's Blessing Book Analysis

    1298 Words  | 6 Pages

    The Twilight of the Old Consensus, ' ' Gordon provides a trace of the fiscal policy after the end of World War 1 and how it led to the shock experienced during the Great depression. Finally, in ' 'Keynesianism and the Madison Effect, ' ' Gordon argues that after the end of World War 2, economists relied on Keynesian deficit-spending theory to dictate fiscal and monetary policy. These chapters have been used to sum up the

    Read More

  • Franklin Delano Roosevelt: Economic And Social Reform

    931 Words  | 4 Pages

    Although the Great Depression had torn apart the prosperity of the United States, hope soon enough resurfaced in the form of presidential candidate Franklin Delano Roosevelt’s promises of a “new deal”. However, Roosevelt’s attempts at economic and social reform met mixed results - although his efforts to mend the extreme personal debt of farms and banks (as well as the general population) did succeed (at least in part), his attempts to remedy the unemployment crisis and the growing national debt were failures, and in the case of national debt, he may have even made the problem worse. The origin of these failures is likely the methods Roosevelt used themselves - one effort to fix the economy surrounding farmers was even deemed unconstitutional,

    Read More

  • European Union Dbq Essay

    1022 Words  | 5 Pages

    The European Union is currently undergoing economic struggles within its countries. Since joining the EU, Greece’s

    Read More

  • Milton Friedman's Neoliberalism Analysis

    1215 Words  | 5 Pages

    Milton Friedman revolutionized free market thinking. He believed in a free market as the best solution for the stability of an economy. Basing his theories on Adam Smith’s “invisible hand”, Friedman further developed Smith’s theory. In short, Friedman’s Neoliberalism can be described through one of his quotes on the social responsibility of business, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game” (Cooney, 2012). Friedman’s belief of the market’s perfection is based on the assumption that no actor would agree to a transaction if they did not find it fitting for themselves (Friedman, 1975).

    Read More

  • Henry Paulson Great Depression Summary

    438 Words  | 2 Pages

    Economics is as much or more about confidence and psychology than it is about fancy macro or micro-economic theories. So here we are. Every time Henry Paulson opens his mouth, he spouts some more doom and gloom. The US and world economies are in ful fledge panic.

    Read More

  • Naked Economics Chapter 1

    638 Words  | 3 Pages

    Chapter 11 1. Fiscal policy can be described as the use of government purchases, taxes, transfer payments, and government borrowing with an objective of influencing economy-wide variables such as the employment rates, the economic growth, and the rates of inflation (McEachern, 2015). 1. When all other factors are held constant, a decrease in government purchases will lead to an increase in the real GDP demanded 2. An increase in net taxes, holding other factors constant, will lead to an increase in the real GDP demanded.

    Read More

  • Franklin D. Roosevelt's Response To The Great Depression

    800 Words  | 4 Pages

    In the following days of October, an incredible misfortune occurred. This event would soon be known as “Black Tuesday”. This unfaithful day was the day where the stock market plummeted leading to a great crash in the economy. This led plenty of individuals to become homeless and live in a state of poverty. Many of these individuals began to create their own society's known as Hoovervilles.

    Read More

  • DBQ Great Recession

    624 Words  | 3 Pages

    The Great Recession was a period of general economic decline observed by world markets beginning around the end of the first decade of the 21st century. The recession was a result of a financial crisis in 2007 which effected the years to come . The primary source of this problem was that banks were creating too much money. In addition, banks had doubled the amount of money and debt in the economy. Resulting in a financial crisis as the government and banks had failed to constrain the financial system’s creation of private credit and money.

    Read More

  • Henry Hazlitt Economics In One Lesson Analysis

    676 Words  | 3 Pages

    In his book “Economics in One Lesson”, Henry Hazlitt states that economic fallacies are spawned by “the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all group; it is the fallacy of overlooking secondary consequences” (1979). Hazlitt continues to say that “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups” (Hazlitt, 1979). The Federal Reserve is a good example of a system put in place for the

    Read More

  • The Pros And Cons Of Classical Economics

    791 Words  | 4 Pages

    The events of the 1980s and early 1990s do not appear to have been consistent with the hypotheses of either the monetarist or new classical schools. New Keynesian economists have incorporated major elements of the ideas of the monetarist and new classical schools into their formulation of macroeconomic

    Read More

  • Classical And Classical Economics: The 1929 Economic Crisis

    1116 Words  | 5 Pages

    1929 economic crisis, which is generally called as Great Depression, had upset the balance of world economic order. Until the depression, classical liberal economic theories were dominating World order. Classical economics is a supply oriented theory, claiming that whatever the level of supply, it is going to create its own demand in the market. If the free market determines the levels of prices, economy will always be in the situation of full employment. Accordingly, states should never interfere in the market.

    Read More

More about Neoclassical Macroeconomic Theory

Open Document