Traditional Macroeconomic Models and the Great Recession

Orderstatistic reports:

A common narrative: analysts who used traditional Keynesian tools to understand the crisis made better predictions and were in a better position to diagnose the problem. This narrative may be comforting to some but unfortunately it’s not correct.

In some sense, the truth of our predicament is even scarier. Macroeconomists were caught completely off-guard by the financial crisis. None of the models we were accustomed to use provided insights or policy recommendations that could be used for fighting the crisis. This is particularly true for New and Old Keynesian models. The New Keynesian model (particularly its DSGE manifestations) was the dominant macroeconomic paradigm in the pre-crisis period and judging by many of the presentations at the National Bureau of Economic Research (NBER) summer meetings, the New Keynesian or Old Keynesian (referred to as “paleo Keynesian” by some of the meeting participants) continue to serve as the primary lens through which we try to make sense of the macroecononmy.

The failure of central planning.