Professor Vines insists, ‘The old core assumption that the economy returns to one equilibrium point is a major diversion from reality. This assumption makes it badly unsuited to studying large crises and transitions which see unemployment multiply and financial systems in crisis. While this remains the profession’s generally accepted framework, the contributors to this issue of the Oxford Review of Economic Policy argue it is no longer fit for purpose.Īccording to today’s journal issue, the NK-DSGE model is unsuited to understanding large economic shocks. At the heart of the old model is the assumption that all disturbances are temporary and the economy eventually returns to one stable ‘equilibrium’, in which it continues to grow. Macroeconomics has been dominated by one core approach for the last two decades: the ‘New Keynesian Dynamic Stochastic General Equilibrium’ (NK-DSGE) model. Its reputation was not helped by the slow and weak recovery from the 2008 crisis, which most observers now agree was made worse by world-wide austerity policies. Since the 2008 global financial crisis, which was not seen coming by most macroeconomists, the field has undergone a difficult decade. The old economic model has already failed us badly in the 21 st century’. Professor Vines adds, ‘An economic model that cannot handle serious shocks is like a medical science that does not study major disease outbreaks it is likely to let us down at the most critical of moments. This shift breaks with more than a century of macroeconomic thinking and has wide-ranging implications for economic thought and practice Professor Vines and Dr Wills argue that the old macroeconomic paradigm is being replaced by an approach which is less tied to idealised theoretical assumptions, takes real-world data more seriously, and is, therefore, far better suited to dealing with 21 st century challenges.ĭr Wills says, ‘This shift breaks with more than a century of macroeconomic thinking and has wide-ranging implications for economic thought and practice.’ They argue a more open, more diverse, paradigm is emerging, which is far better equipped to deal with contemporary challenges such as the global financial crisis, climate change and COVID. Summarising the Rethinking Macroeconomics project in the Oxford Review of Economic Policy, Oxford economists Professor David Vines and Dr Samuel Wills call for a shift away from the assumptions which have underpinned economic theory for decades – and which do not meet today’s challenges. If we ever lived in such a world, we no longer do The old model of ‘macroeconomics’ was built for a stable world free from large economic shocks. ![]() If we ever lived in such a world, we no longer do.’ ![]() Oxford Professor David Vines says, ‘The old model of ‘macroeconomics’ was built for a stable world free from large economic shocks.
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