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The Financial Crisis and the Systemic Failure of Academic Economics

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  • David Colander

    ()

  • Hans Föllmer
  • Armin Haas
  • Michael Goldberg
  • Katarina Juselius
  • Alan Kirman
  • Thomas Lux
  • Brigitte Sloth

Abstract

The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s focus on models that, by design, disregard key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0901.pdf
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Bibliographic Info

Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0901.

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Length: 16 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:mdl:mdlpap:0901

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Keywords: financial crisis; academic moral hazard; ethic responsibility of researchers;

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  1. Krahnen, Jan Pieter & Wilde, Christian, 2008. "Risk transfer with CDOs," CFS Working Paper Series 2008/15, Center for Financial Studies (CFS).
  2. David Colander & Hans Föllmer & Armin Haas & Michael Goldberg & Katarina Juselius & Alan Kirman & Thomas Lux & Brigitte Sloth, 2009. "The Financial Crisis and the Systemic Failure of Academic Economics," Kiel Working Papers 1489, Kiel Institute for the World Economy.
  3. Krahnen, Jan Pieter, 2005. "Der Handel von Kreditrisiken: Eine neue Dimension des Kapitalmarktes," CFS Working Paper Series 2005/05, Center for Financial Studies (CFS).
  4. Masanao Aoki, . "Reconstructing Macroeconomics: A Perspective from Statistical Physics and Combinatorial Stochastic Processes," UCLA Economics Online Papers 390, UCLA Department of Economics.
  5. Cogley, Timothy & Sargent, Thomas J., 2008. "The market price of risk and the equity premium: A legacy of the Great Depression?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 454-476, April.
  6. Kevin D. Hoover & Katarina Juselius & Søren Johansen, 2007. "Allowing the Data to Speak Freely: The Macroeconometrics of the Cointegrated Vector Autoregression," Discussion Papers 07-35, University of Copenhagen. Department of Economics.
  7. David F. Hendry & Hans-Martin Krolzig, 2005. "The Properties of Automatic "GETS" Modelling," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(502), pages C32-C61, 03.
  8. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  10. Frydman Roman & Goldberg Michael D., 2008. "Macroeconomic Theory for a World of Imperfect Knowledge," Capitalism and Society, De Gruyter, De Gruyter, vol. 3(3), pages 1-78, December.
  11. Barry Eichengreen, 2008. "Origins and Responses to the Current Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 9(4), pages 6-11, December.
  12. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198283164, October.
  13. Krahnen, Jan Pieter & Wilde, Christian, 2006. "Risk Transfer with CDOs and Systemic Risk in Banking," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5618, C.E.P.R. Discussion Papers.
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Blog mentions

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  4. Is de economische wetenschap verantwoordelijk voor het ontstaan van de kredietcrisis?
    by Hans Blommestein in Me Judice on 2009-11-25 12:00:00
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  8. Time to democratize science?
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