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What have mainstream macroeconomists learn’t? Short answer: nothing

Last week (December 10, 2012), the Bank of International Settlements released a working paper – The financial cycle and macroeconomics: What have we learnt? – which not only recognised that the accepted mainstream macroeconomic theory is critically deficient but also implied that the response to that failure in the context of the global financial crisis is not likely to be satisfactory. Faced with a major credibility crisis at the onset of the GFC, there has been a mad rush by mainstream economists to add financial sector to their models. It might surprise you that the major models used to teach students and motivate research in macroeconomics didn’t even have financial sectors included, among other glaring deficiencies. Now there is a flurry of work to address that deficiency. The problem is that all this effort, which will produce countless papers at academic conferences, will not address the fundamental issue – the mainstream macroeconomics framework is rotten to the core. The BIS paper provides some insights into that issue. When it comes down to the fundamental question: What have we learn’t? If the we is referring to the dominant body of macroeconomists that teach in universities, publish research in the journals and occupy key positions in policy-making bureaucracies, then the answer is simple: Nothing! (thanks Roger). But we have also learn’t that Modern Monetary Theory (MMT) has demonstrated itself to be a credible framework.

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