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Blanchard and Summers: Back to the future

Summary:
From Maria Alejandra Madi  Olivier Blanchard and Lawrence Summers have recently called for a reflection about the macroeconomic tools required to manage the outcomes of the 2008 global crisis  in their paper Rethinking Stabilization Policy. Back to the Future. The relevant question they address is: Should the crisis lead to a rethinking of both macroeconomics and macroeconomic policy similar to what we saw in the 1930s or in the 1970s? In other words, should the crisis lead to a Keynesian approach to macroeconomic policy or will it reinforce the agenda suggested by mainstream macroeconomics since the 1990s? Since the 1990s, mainstream macroeconomics has largely converged on a view of economic fluctuations that has become the basic paradigm of research and macroeconomic policy.

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from Maria Alejandra Madi 

Olivier Blanchard and Lawrence Summers have recently called for a reflection about the macroeconomic tools required to manage the outcomes of the 2008 global crisis  in their paper Rethinking Stabilization Policy. Back to the Future. The relevant question they address is: Should the crisis lead to a rethinking of both macroeconomics and macroeconomic policy similar to what we saw in the 1930s or in the 1970s? In other words, should the crisis lead to a Keynesian approach to macroeconomic policy or will it reinforce the agenda suggested by mainstream macroeconomics since the 1990s?

Since the 1990s, mainstream macroeconomics has largely converged on a view of economic fluctuations that has become the basic paradigm of research and macroeconomic policy. According to this view of unexplained random underlying shocks, the fluctuations result from small shocks to components of demand and supply with linear propagation mechanisms which do not prevent the economy to return back to the potential output trend.  Considering a world of regular fluctuations:  (1) dynamic stochastic general equilibrium (DSGE) models are used to develop structural interpretations to the observed dynamics, (2) optimal policy is mainly based on monetary feedback rules- such as the interest rate rule- while fiscal policy is avoided as a stabilization tool, (3) the role of the finance is often centered on the yield curve, and (4) macro prudential policies are not considered.  read more

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