Posted by: Dirk | September 22, 2016

Paul Romer’s new paper: The Trouble with Macroeconomics

The World Bank’s chief economist has generated quite a stir with his new paper, which can be downloaded here. This is the abstract:

For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.

Of course, this is the perfect opportunity to refer to my new book on “The Troubles Macroeconomics”, mainly financial crises and the mass unemployment that results when governments don’t come to the rescue. This is not an assumption but comes out of a careful reading of the way the balance sheets work. In my book, I look at the generation of central bank money, commercial bank deposits, fiscal and monetary policy, QE, the TARGET2 system and the way that real businesses operate. I think that this is the way to go forward since balance sheets are quite objective. In a new paper, I call this “the balance sheet approach“, which is a new paradigm inside of which both some neoclassical and some heterodox economists are operating.

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