Fabrice Collard, Â« A History of Macroeconomics: A Macroeconomic Viewpoint Â», Åconomia, 6-1 | 2016, 139-147. in unique equilibrium, rational expectations models. reports); (2) an interpretation of the history of macroeconomics relying on a tra-ditional view of the history of science about scienti c progress ; (3) a tool for the standardization of the eld, legitimizing the current DSGE models. Sims, Christopher A. Let us focus on the NKP curve. The lower rates aggravate agency problems in the interbank market, which leads to a reduction in market funding and further pushes down the interest rate. First, like modern macroeconomics, the book is dynamic. URL : http://journals.openedition.org/oeconomia/2236; DOI: https://doi.org/10.4000/oeconomia.2236, Department of Economics, University of Bern. The two fundamental behavioral equations, IS and NKP curves, are given explicit micro-foundations. Many people have begun to wonder if the United States will ever escape the Great Depression’s cruel grip. 1998. Macroeconomics is born. So what about our three equations model? Most economists believe that Keynes’s ideas best explain fluctuations in economic activity. It is 1970. De Vroey shows how the evolution of ideas in the field was not simply the outcome of quarrels regarding competing visions of the worldâe.g. The model therefore contains all the required ingredients that make a model achieve the Lucasâ project. Financial sector. Econometrica, 81(2): 739-779. The Economics of Attention. American Economic Review, 104(8): 2320-2367. One commonly heard argument against the macroeconomic models were their inability to talk about the financial aspects of the business cycle. 2015. 2011. A much wider range of evidence is brought to bear on quantitative questions in macroeconomics. (1988). However, the mathematical language has had its own merits. Why should firms adopt this rule of thumb? 2010. Seen through the lenses of the previous statement, it satisfies the requirement. 2015. 2010. The central idea behind the ideology is that markets work best when they are left alone and role of the government be as minimal as possible. So what about our three equations model? Many improvements have been (and still are) introduced over the recent years, addressing some of the concerns and critics that were raised against DSGE models. Recently, Challe and Ragot (2011) proposed a modeling framework that preserves a limited heterogeneity and allows for tractability. MimÃ©o University of Luxembourg. Lucas and his colleagues suggest a world in which self-correction is swift, rational choices by individuals generally cancel the impact of fiscal and monetary policies, and stabilization efforts are likely to slow economic growth. First of all, it has forced macroeconomists to put more structure on their discourse. (2009), Collard and Dellas (2010) among others. The second showed the power of these same policies to create them. He counsels a policy of steady money growth, leaving the economy to adjust to long-run equilibrium on its own. Adam Smith and the Honourable East India Company. Initially, the RBC literature therefore relied on this assumption to keep models tractable and be able to simulate them on the computers available at that time. This is studied by Hansen and Sargent (2007) who adapt robust control techniques to study situations where decision makers acknowledge misspecification in economic modeling. Boissay, FrÃ©dÃ©ric, Fabrice Collard, and Frank Smets. 6where equations (1)-(3) denote, respectively, the IS curve, the New-Keynesian Phillips (NKP) curve and the monetary policy rule. A History of Macroeconomics from Keynes to Lucas and Beyond, Cambridge: Cambridge University Press, 2015, 445 pages, ISBN: 9781107584945, Michel De Vroey offers his reader a very pleasant journey through the History of Macroeconomics, from Keynesâ original insights, through the Friedmanian and Lucasian revolutions, to the latest developments. Its aim is to While this has proven fruitful, this approach is also very computationally expensive. Lucas, Robert E. Jr. 1976. Interestingly, 35 years later, the so-called Dynamic Stochastic General Equilibrium (DSGE) models, that are now commonly used in Central Banks to understand and predict the effects of monetary policy decisions, are still built in reference to the Lucasâ project. Its aim is to The IS curve corresponds to the aggregation of individual optimal consumption saving arbitrage derived from the maximization of expected lifetime utility subject to the intertemporal budget constraint of the agent. Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, 2.3 Applications of the Production Possibilities Model, Chapter 4: Applications of Demand and Supply, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, Chapter 5: Macroeconomics: The Big Picture, 5.1 Growth of Real GDP and Business Cycles, Chapter 6: Measuring Total Output and Income, Chapter 7: Aggregate Demand and Aggregate Supply, 7.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 7.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 8.2 Growth and the Long-Run Aggregate Supply Curve, Chapter 9: The Nature and Creation of Money, 9.2 The Banking System and Money Creation, Chapter 10: Financial Markets and the Economy, 10.1 The Bond and Foreign Exchange Markets, 10.2 Demand, Supply, and Equilibrium in the Money Market, 11.1 Monetary Policy in the United States, 11.2 Problems and Controversies of Monetary Policy, 11.3 Monetary Policy and the Equation of Exchange, 12.2 The Use of Fiscal Policy to Stabilize the Economy, Chapter 13: Consumptions and the Aggregate Expenditures Model, 13.1 Determining the Level of Consumption, 13.3 Aggregate Expenditures and Aggregate Demand, Chapter 14: Investment and Economic Activity, Chapter 15: Net Exports and International Finance, 15.1 The International Sector: An Introduction, 16.2 Explaining Inflation–Unemployment Relationships, 16.3 Inflation and Unemployment in the Long Run, Chapter 17: A Brief History of Macroeconomic Thought and Policy, 17.1 The Great Depression and Keynesian Economics, 17.2 Keynesian Economics in the 1960s and 1970s, Chapter 18: Inequality, Poverty, and Discrimination, 19.1 The Nature and Challenge of Economic Development, 19.2 Population Growth and Economic Development, Chapter 20: Socialist Economies in Transition, 20.1 The Theory and Practice of Socialism, 20.3 Economies in Transition: China and Russia, Nonlinear Relationships and Graphs without Numbers, Using Graphs and Charts to Show Values of Variables, Appendix B: Extensions of the Aggregate Expenditures Model, The Aggregate Expenditures Model and Fiscal Policy. Once the focus is shifted towards redistributive policies or models where heterogeneity affect aggregate level (typically models featuring financial frictions), heterogeneity shall be kept. 2015. Why should firms adopt this rule of thumb? The History of Macroeconomics from Keynes’s General Theory to the Present Michel De Vroey and Pierre Malgrange June 2011 Abstract This paper is a contribution to the forthcoming Edward Elgar Handbook of the History of Economic Analysis volume edited by Gilbert Faccarello and Heinz Kurz. CESifo Economic Studies, 56(4): 498-535. Keynes, The General Theory of Employment, Interest, and Money (1936). It is the 1930s. Collard, Fabrice and Harris Dellas. , 2010 and 2011). (2013) offer a new theory of fluctuations that can accommodate the Keynesian notion of animal spirits in unique equilibrium, rational expectations models. In particular, the larger the credit boom relative to the possibilities for productive use of loans, the larger the fall in interest rates, and the higher the probability of disastrous freeze of the interbank market. Angeletos, Georges Marios, Fabrice Collard, and Harris Dellas. the role of competition, equilibrium, expectations, dynamics... but also the outcome of constant progress in neighboring sciences. Most DSGE models are solved relying on local perturbation methods, which assumes differentiability of the solution, and cannot therefore generate crises. Working Paper 18102, NBER. A first common critique addressed to these models is the use of the representative agent assumption (see for example Kirman, 2010). Income and Wealth Heterogeneity in the Macroeconomy. I have to agree with Brad’s conclusion that macro theory must re-connect … All these parameters being specified at the micro level, they are deep parameters and the model is robust to the Lucas critique. The first typical examples of models that fulfills these requirements are given by the Real Business Cycle (RBC) model proposed by Kydland and Prescott (1982) and King et al. 2010. Although simple, this stylized model captures the essence of most DSGE models and appears to contain all ingredients of the Lucasian project. This is the result of limited communication across agents, obtained by allowing trading to be random and decentralized. Computational Suite of Models with Heterogeneous Agents II: Multi-Country Real Business Cycle Models. It is however assumed that these agents cannot fully insured against the idiosyncratic employment risk which therefore preserves all heterogeneity and breaks away from the representative agent assumption. 2013. Financial assets: Financial sector Nominal v. real interest rates: Financial … (Lucas, 1980, 696), 5which underlines most of Business Cycle Theory that De Vroey explores. parameters is well understood. Macroeconomics with Financial Frictions: A Survey. Collard, Fabrice and Harris Dellas. As a consequence, macroeconomics has become, to a large extent, a quantitative discipline. Sneessens, Henri. Interestingly, the same question arose in the late 1970âs. Number of Volumes: 3 Abstract: The 2020 COVID-19 crisis can spur research on firms’ corporate finance decisions and their macroeconomic implications, similar to the wave of important research on banking and household finance triggered by the 2008 financial crisis. At first glance, the representative agent assumption appears to be inconsistent with a serious treatment of micro-foundations. Section 1 of this article analyzes this threefold character of the standard narrative. They also drastically changed the way we evaluate our models and enhanced their falsifiability. It however alleviates a very tricky technical difficulty. This is the result of limited communication across agents, obtained by allowing trading to be random and decentralized. This was, for example, already the case in the Lucasâ (1972) seminal islands model, where agents were already facing a static signal extraction problem.
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