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Teaching macroeconomics after the crisis

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  • Bofinger, Peter
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    Abstract

    It is often said that after the crisis economic textbooks have to be rewritten. However, as surveys show, almost all professors continue using the standard IS-LM/AS-AD model as the workhorse for undergraduate training. This paper shows that the IS-LM/AS-AD model is not only full of obvious inconsistencies, e.g. using two aggregate demand and two aggregate supply curves, it also presents the economy as an inherently stable system which is only destabilized by wage rigidities and policy shocks. Thus, it cannot explain involuntary unemployment and it pretends that deflation is a self-stabilizing mechanism if an economy is affected by a negative demand shock. This paper shows that it is relatively easy to reinterpret the basic model in a way that inconsistencies can be avoided and the inherent instability of macroeconomic processes which underlies the Keynesian paradigm can be demonstrated. It also allows a discussion of monetary policy in a more topical way than the traditional LM-curve. --

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    Bibliographic Info

    Paper provided by University of Würzburg, Chair for Monetary Policy and International Economics in its series W.E.P. - Würzburg Economic Papers with number 86.

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    Date of creation: 2011
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    Handle: RePEc:zbw:wuewep:86

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    Related research

    Keywords: Keynesian economics; AS/AD model; economic crisis; cyclical unemployment;

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The perpetual lag of macroeconomics teaching
      by Economic Logician in Economic Logic on 2012-03-26 14:00:00

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