This past week I had a lot of meetings and on the occasions (few and far between, naturally) when the meetings themselves failed to hold my full attention, I pondered the sorry state of macroeconomics. Of course, I'm not the only person to have been doing so lately, post-crisis. The attacks on macroeconomics (actually, usually on economics full stop, but that's for another post) have not as yet stimulated much more than defensiveness in response. But surely, surely, macroeconomists are debating amongst themselves how they can restore intellectual credibility as well as rigour to their branch of the discipline?

It seems not. Yesterday Ben Bernanke gave a speech at Princeton which was mainly about microeconomics, which in my view (as a microeconomist) is relatively easy to defend. In the paragraph late in his speech in which he turns to macro, he concluded:

“Standard macroeconomic models, such as the workhorse new-Keynesian
model, did not predict the crisis, nor did they incorporate very easily
the effects of financial instability. Do these failures of standard
macroeconomic models mean that they are irrelevant or at least
significantly flawed?  I think the answer is a qualified no. Economic
models are useful only in the context for which they are designed. Most
of the time, including during recessions, serious financial instability
is not an issue.”

So that's ok then – the models work when they work. Hmmm. In fact, the Fed chairman then went on to add a few comments about the need to incorporate credit and financial mechanisms into macro models. But it's a pretty unsatisfactory response from one of the world's leading macroeconomists.

Back to my reflections instead, then. I remembered from my undergraduate days a book by the French economist Edmond Malinvaud, The Theory of Unemployment Reconsidered. It's a terrific book – although unfortunately out of print – which injects the work of earlier Keynesians such as Axel Leijonhufvud on disequilibrium dynamics into a classical general equilibrium framework. Depending on the initial conditions and shocks hitting the economy, the aggregate outcome then falls into one of three disequilibrium regimes: classical unemployment, Keynesian unemployment and repressed inflation. The policy response required for a return to equilibrium depends on which regime the economy is in.

This seems a useful framework for assessing exactly the kind of debate we're having now. If governments try to cut their budget deficits quickly will that be good for the economy, keeping it out of a debt trap, or bad for the economy, due to the contractionary impact of spending cuts? It's clear that macroeconomists, divided into two camps shouting at each other, don't know. It's decades since I've done any macro, but I'm going to read my yellowing copy of Malinvaud's book carefully, and let you all know the answer.