Discussion 2/9/15 – The Global Financial Crisis: Did Macroeconomics Fail?

Our first discussion is slated for Monday, Feb. 9th at 7pm, in SHDH 213. I will be taking the lead on this one, so feel free to email me (modibo@sas.upenn.edu) with any suggestions.

Topic

While the financial crises of 2007-2008 are a massive subject in and of themselves, we will focus on evaluating the field of macroeconomics in light of these events. You have surely heard claims, by economists and non-economists alike, that the crisis, particularly in the U.S., represented a fundamental failure on the part of economists to prescribe policy and predict market behavior. Others, like Paul Krugman, used the opportunity to push (probably longstanding) criticisms against the field, particularly on the affinity for technically-sophisticated but otherwise questionable theoretical models. Despite evident failures in both policy and prediction, is a shift in our approach to macroeconomics really necessary? What changes have occurred since 2009? What changes should still occur, if any?

When using the financial crisis to criticize macroeconomics, another important question arises. Was the crisis predictable, even in theory? Proponents of the efficient markets hypothesis might answer in the negative. Others suggest that the crisis itself is predictable, yet the specific timing isn’t. And it’s certainly possible to devise scenarios where even the widespread expectation of an upcoming crisis isn’t sufficient to prevent its occurrence, nor even its continued aggravation. Do these arguments imply we are unable to predict and/or prevent market collapses, even with (or because of) the assumption of rational expectations?

Slides

Here are the brief presentation slides I made for this discussion: JC 2-9-15

Readings

The primary reading for this session is “How did Economists get it so Wrong?” by Paul Krugman (2009).

The secondary (i.e. optional) reading is John Cochrane’s (2009) response, “How did Paul Krugman get it so Wrong?”.

For background on the global financial crisis, we recommend two articles by The Economist magazine, “The Slumps that Shaped Modern Finance” and “The Origins of the Financial Crisis”.

For background on the use/role of models in economics, we recommend Paul Pfleiderer’s (2014), “Chameleons: the Misuse of Theoretical Models in Economics and Finance”, and “Economic Models as Analogies” by Gilboa et al. (2011). The latter is co-authored by Prof. Postlewaite, whom you may recognize from ECON 212.

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