A current meme proposes that macroeconomics has failed - both to predict and to explain the credit crisis. The new claims against macro have only added fuel to the fire of those who have suggested that macro shouldn't be part of the core curriculum of economics PhD programs or shouldn't be a discipline altogether, unless it undergoes serious changes.
Does macro have anything to say about the current crisis?
In short, I think it does. To highlight some of the most relevant macro work:
Does macro have anything to say about the current crisis?
In short, I think it does. To highlight some of the most relevant macro work:
1) Kiyotaki and Moore's 1997 article
in the JPE on credit cycles, seems to be one of the most relevant
pieces of work regarding what has happened. While is doesn't have a fully
developed financial sector, MBSs, and rating agencies, it does well to
caputure the fundamentals of a bubble in a mainstream, macroeconomic
model.
2) Carlos Garriga and his coauthors' work on housing. This research is at the frontier of models of the housing sector. The models have heterogenous agents, endogenous mortgage choice (FRM, interest-only, combo loans), and can replicate many important facts of the US housing market (e.g. homeownership rates, foreclosures). While this is relatively new work, and many extensions of the model need to be worked on, this area of macro will be very helpful in the quantitative assesment of the housing bubble- what role did different mortgages play in the rise and fall in housing prices? What can you attribute to favorable tax treatment of home ownership.
3) The work of Jim Hamilton (and others such as Arturo Estrella) on the importance of credit in propagating business cycles. This is mainstream macro work in the area that is very relevent to the current situation as the financial collapse has taken the real economy down with it. I've even thought this area important enough to venture into it a bit myself.
The above are three examples of mainstream macroeconomics that are very relevant to the current situation. To say that macro is dead is hyperbole. The discipline will improve greatly over the next few years as a result of the crisis. Models need to have a more developed financial sector and better inclusion of things like assymetric information regarding asset values and liquidity issues. But these can be added to the current framework of macroeconomics- one doesn't have to start from scratch. Lets not throw the baby out with the bathwater.
2) Carlos Garriga and his coauthors' work on housing. This research is at the frontier of models of the housing sector. The models have heterogenous agents, endogenous mortgage choice (FRM, interest-only, combo loans), and can replicate many important facts of the US housing market (e.g. homeownership rates, foreclosures). While this is relatively new work, and many extensions of the model need to be worked on, this area of macro will be very helpful in the quantitative assesment of the housing bubble- what role did different mortgages play in the rise and fall in housing prices? What can you attribute to favorable tax treatment of home ownership.
3) The work of Jim Hamilton (and others such as Arturo Estrella) on the importance of credit in propagating business cycles. This is mainstream macro work in the area that is very relevent to the current situation as the financial collapse has taken the real economy down with it. I've even thought this area important enough to venture into it a bit myself.
The above are three examples of mainstream macroeconomics that are very relevant to the current situation. To say that macro is dead is hyperbole. The discipline will improve greatly over the next few years as a result of the crisis. Models need to have a more developed financial sector and better inclusion of things like assymetric information regarding asset values and liquidity issues. But these can be added to the current framework of macroeconomics- one doesn't have to start from scratch. Lets not throw the baby out with the bathwater.
