April 22, 2013

IS THERE REALLY A MACROECONOMIC MODEL...:

The end of macro magic (Robert J. Samuelson, April 21, 2012, Washington Post)

The International Monetary Fund recently held a conference that should concern most people despite its arcane subject -- "Rethinking Macro Policy II." Macroeconomics is the study of the entire economy, as opposed to the examination of individual markets ("microeconomics"). The question is how much "macro" policies can produce and protect prosperity. Before the 2008-09 financial crisis, there was great confidence that they could. Now, with 38 million unemployed in Europe and the United States -- and recoveries that are feeble or nonexistent -- macroeconomics is in disarray and disrepute. [...]

The economic models that didn't predict the crisis have also repeatedly overstated the recovery. The tendency is to blame errors on one-time events -- say, in 2011, the Japanese tsunami, the Greek bailout and the divisive congressional debate over the debt ceiling. But the larger cause seems to be the models themselves, which reflect spending patterns and behavior by households and businesses since World War II.

"The events [stemming from] the financial crisis were outside the experience of the models and the people running the models," Nigel Gault said in an interview. (Gault, the former chief U.S. economist for the consulting firm IHS, was not at the conference.) The severity of the financial crisis and Great Recession changed behavior. Models based on the past don't do well in the present. Many models assumed that lower interest rates would spur more borrowing. But this wouldn't happen if lenders -- reacting to steep losses -- tightened credit standards and potential borrowers -- already with large loans -- were leery of assuming more debt. Which is what occurred.

...that doesn't say that high inflation favors borrowers and deflation favors lenders?  

Posted by at April 22, 2013 4:12 AM
  

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