Rethinking macroeconomic theory before the next crisis

Marc Lavoie

Review of Keynesian Economics, 2018, vol. 6, issue 1, 1-21

Abstract: Misguided economics policies relying on an unrealistic macroeconomic theory that denied the possibility of a crisis are at the origins of the global financial crisis. The goal of the present paper is to recall how the end of the Great Moderation has been interpreted by the advocates of mainstream economics, and how they have questioned their own macroeconomic theories as a consequence of what happened during and after the financial crisis. There is thus a need to reconsider most aspects of mainstream theory. In particular, the crisis has once more demonstrated that potential output is influenced by aggregate demand – a phenomenon associated with hysteresis, which also questions concepts such as the natural rate of interest and crowding-out effects.

Keywords: potential output; financial crisis; hysteresis; DSGE models (search for similar items in EconPapers)
JEL-codes: E31 E51 E52 E58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (8)

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Working Paper: Rethinking macroeconomic theory before the next crisis (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:elg:rokejn:v:6:y:2018:i:1:p1-21

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