2018/23 | LEM Working Paper Series | ||||||||||||||||
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Toward a New Microfounded Macroeconomics in the Wake of the Crisis |
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Eugenio Caverzasi and Alberto Russo |
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Abstract | |||||||||||||||||
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The Great Recession that followed the financial crisis of 2007 is not
only the largest economic crisis after the Great Depression of the
1930s, it also signals a crisis of economics as a discipline. This is
not only the consequence of the inadequacy of mainstream
macroeconomics, and specically the DSGE workhorse model, to forecast
such a huge event, or at least to detect the worrying tendencies
towards it. Even more relevant is the choice to explicitly avoid the
modelling of large crises (that for someone is a motivation for not
attacking pre-crisis DSGE models focused on the analysis of small
deviations from the steady-state), so denying the intrinsic nature of
capitalism, a system that necessarily proceeds through cycles and
(extended) crises. The replies of the DSGE approach to critics have
led to extensions regarding for instance the role of financial
frictions, heterogeneous agents, and bounded rationality (though
typically in the form of quasi-rational expectations). The alternative
paradigm of Agent-Based Macroeconomics can take into account all these
elements at once within an evolutionary modelling framework based on
heterogeneity and interaction, so capable to endogenously reproduce
complex dynamics, from small fluctuations to large crises, due to
innovation and industrial dynamics, rising inequality and financial
instability, and so on. The integration between Agent-Based
Macroeconomics and the (post-Keynesian) Stock-Flow Consistent approach
represents a promising way for the future development of this research
field.
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