Macroeconomic Theory

    Governments turn to macroeconomic theory to help shape policies to manage instability. Current theories do not adequately support our policy needs. Credit markets, income, and employment are all inherently unstable. We need better theory to help us design better institutions and better policies.

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    Persistent Effects of Autonomous Demand Expansions

    The prevailing wisdom that aggregate demand ‘shocks’ determine short-run cyclical fluctuations around a supply-determined equilibrium growth rate and an associated equilibrium unemployment rate (or NAIRU) has been called into question by various streams of literature in the last decades. Specifically, a recently revived literature on hysteresis finds significant persistence in the effects of recessions and negative aggregate demand shocks (Blanchard et al. 2015; Martin et al. 2015). Read more