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What Can Neoclassical Theory Tell Us About Recessions (Serious Question)? — Brian Romanchuk

Summary:
...I will outline the issues as I see it. One typical insight offered from neoclassical modelling is that a recession would be the result of some sort of shock. Although my argument is that recessions are hard to forecast, that seems to offer almost no information. We can usually see certain mechanisms behind a recession, as is discussed in my manuscript (which is volume one). So it's a hard sell to say that recessions are purely random processes. We can get slightly more specific, such as having some sort of shock to the credit markets, which might be used to help explain the events of the Financial Crisis. But once again, the Financial Crisis, was hardly "random," market participants (including bankers within "market participants") followed behavioural patterns that Minsky described

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...I will outline the issues as I see it. One typical insight offered from neoclassical modelling is that a recession would be the result of some sort of shock. Although my argument is that recessions are hard to forecast, that seems to offer almost no information. We can usually see certain mechanisms behind a recession, as is discussed in my manuscript (which is volume one). So it's a hard sell to say that recessions are purely random processes.
We can get slightly more specific, such as having some sort of shock to the credit markets, which might be used to help explain the events of the Financial Crisis. But once again, the Financial Crisis, was hardly "random," market participants (including bankers within "market participants") followed behavioural patterns that Minsky described long ago. Saying that there is a "random shock" to credit markets offers a whole lot less information than Minsky's writings.
So I am left with the conundrum: what is worthwhile from neoclassical theory that is worthwhile putting into a second volume of a book on recessions?
Bond Economics
What Can Neoclassical Theory Tell Us About Recessions (Serious Question)?
Brian Romanchuk
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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