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Heterodox Shocks

  • Greg Hannsgen

Should shocks be part of our macro-modeling tool kit—for example, as a way of modeling discontinuities in fiscal policy or big moves in the financial markets? What are shocks, and how can we best put them to use? In heterodox macroeconomics, shocks tend to come in two broad types, with some exceptions for hybrid cases. What I call Type 1 shocks are one-time exogenous changes in parameters or variables. They are used, for example, to set computer simulations in motion or to pose an analytical question about dynamic behavior outside of equilibrium. On the other hand, Type 2 shocks, by construction, occur at regular time intervals, and are usually drawn at random from a probability distribution of some kind. This paper is an appreciation and a survey of shocks and their admittedly scattered uses in the heterodox macro literature, along with some proposals and thoughts about using shocks to improve models. Since shocks of both types might appear at times to be ad hoc when used in macro models, this paper examines possible justifications for using them.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_766.

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Date of creation: Jun 2013
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Handle: RePEc:lev:wrkpap:wp_766
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. James Tobin, 1969. "Money and Income: Post Hoc Ergo Propter Hoc?," Cowles Foundation Discussion Papers 283, Cowles Foundation for Research in Economics, Yale University.
  2. repec:cup:cbooks:9780521850254 is not listed on IDEAS
  3. Alessandro Caiani & Antoine Godin & Stefano Lucarelli, 2012. "Innovation and Finance: An SFC Analysis of Great Surges of Development," Economics Working Paper Archive wp_733, Levy Economics Institute.
  4. Fabrizio Coricelli & Riccardo Fiorito, 2013. "Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00820820, HAL.
  5. Peter Skott, 2011. "Business cycles," UMASS Amherst Economics Working Papers 2011-21, University of Massachusetts Amherst, Department of Economics.
  6. repec:cup:cbooks:9780521643511 is not listed on IDEAS
  7. Tobin, James, 1970. "Money and Income: Post Hoc Ergo Propter Hoc?: Rejoinder," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 328-29, May.
  8. Greg Hannsgen, 2012. "Fiscal Policy, Unemployment Insurance, and Financial Crises in a Model of Growth and Distribution," Economics Working Paper Archive wp_723, Levy Economics Institute.
  9. Éric Tymoigne, 2011. "Measuring Macroprudential Risk: Financial Fragility Indexes," Economics Working Paper Archive wp_654, Levy Economics Institute.
  10. Amitava Krishna Dutt, 2012. "Distributional dynamics in Post Keynesian growth models," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 34(3), pages 431-452, April.
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