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Where Modern Macroeconomics Went Wrong

Listed author(s):
  • Joseph E. Stiglitz
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    This paper provides a critique of the DSGE models that have come to dominate macroeconomics during the past quarter-century. It argues that at the heart of the failure were the wrong microfoundations, which failed to incorporate key aspects of economic behaviour, e.g. incorporating insights from information economics and behavioural economics. Inadequate modelling of the financial sector meant they were ill-suited for predicting or responding to a financial crisis; and a reliance on representative agent models meant they were ill-suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality. The paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23795.

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    Date of creation: Sep 2017
    Handle: RePEc:nbr:nberwo:23795
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    22. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
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    26. Robert J. Shiller, 2007. "Understanding recent trends in house prices and homeownership," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 89-123.
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    38. Cass, David & Stiglitz, Joseph E, 1969. "The Implications of Alternative Saving and Expectations Hypotheses for Choices of Technique and Patterns of Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 586-627, Part II, .
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    41. repec:hrv:faseco:33077925 is not listed on IDEAS
    42. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    43. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part II: Equilibrium Wealth Distributions," NBER Working Papers 21190, National Bureau of Economic Research, Inc.
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    50. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
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    55. John Geanakoplos, 1992. "Common Knowledge," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 53-82, Fall.
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