Sunday, September 13, 2009

State of Macroeconomics

This article on the NYT by Paul Krugman asks how economists got the crisis so wrong. In my opinion, the crisis brought about some serious soul-searching for lots of people, specially macroeconomists, whose mainstream models (by this I mean the neoclassical paradigm) didn't help much in preventing / explaining the crisis.

I'm not saying anything new here, but a big part of the problem is that many models push aside the role of financial markets and the importance of imperfections out there. Of course simplifying assumptions have to be made in order to help our understanding of the world, but sometimes people get carried away and take their models too seriously.

Well, I hope we at least learn something for the next crisis. It's much easier to do empirical than theoretical work these days!

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