Macroeconomics at the Service of Public Policy

Edited by Thomas J. Sargent and Jouko Vilmunen

Co-edited by Thomas J. Sargent, winner of 2011 Nobel Prize in Economics
Showcases the breadth and sophistication of modern macroeconomic analysis aligned with the philosophy and approach undertaken by Seppo Honkapohja
Answers key questions about how the economy functions and how policy should be conducted. Includes contributions on the market as a bearer of risk, the European Debt crisis, and possible stagflation of the US economy
Shows the reader how to build general equilibrium models and apply general equilibrium reasoning
Explains how alternative expectation formation mechanisms, and learning dynamics, shape macroeconomic outcomes
Includes material on Learning and Model Selection, Learning and Model Validation, and Adaptive Learning and Stagnation Regimes

Macroeconomics at the Service of Public Policy

Edited by Thomas J. Sargent and Jouko Vilmunen

Description

This volume uses state of the art models from the frontier of macroeconomics to answer key questions about how the economy functions and how policy should be conducted. The contributions cover a wide range of issues in macroeconomics and macroeconomic policy. They combine high level mathematics with economic analysis, and highlight the need to update our mathematical toolbox in order to understand the increased complexity of the macroeconomic environment. The volume represents hard evidence of high research intensity in many fields of macroeconomics, and warns against interpreting the scope of macroeconomics too narrowly. The mainstream business cycle analysis, based on dynamic stochastic general equilibrium (DSGE) modelling of a particular type, has been criticised for its inability to predict or resolve the recent financial crisis. However, macroeconomic research on financial, information, and learning imperfections had not yet made their way into many of the pre-crisis DSGE models because practical econometric versions of those models were mainly designed to fit data periods that did not include financial crises. A major response to the limitations of those older DSGE models is an active research program to bring big financial shocks and various kinds of financial, learning, and labour market frictions into a new generation of DSGE models for guiding policy. The contributors to this book utilise models and modelling assumptions that go beyond particular modelling conventions. By using alternative yet plausible assumptions, they seek to enrich our knowledge and ability to explain macroeconomic phenomena. They contribute to expanding the frontier of macroeconomic knowledge in ways that will prove useful for macroeconomic policy.

Macroeconomics at the Service of Public Policy

Edited by Thomas J. Sargent and Jouko Vilmunen

Introduction, Thomas J. Sargent and Jouko Vilmunen
Part 1: Financial Crisis and Recovery
1. Is the Market System an Efficient Bearer of Risk?, Kenneth Arrow
2. The European Debt Crisis, Hans-Werner Sinn
3. The Stagnation Regime of the New Keynesian Model and Recent US Policy, George Evans
Part 2: Learning, Incentives, and Public Policy
4. Notes on Agents' Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy, George Evans, Seppo Honkapohja and Kaushik Mitra
5. Learning and Model Validation: An Example, In-Koo Cho and Kenneth Kasa
6. Bayesian Model Averaging, Learning, and Model Selection, George Evans, Seppo Honkapohja, Thomas J. Sargent, and Noah Williams
7. History-Dependent Public Policies, David Evans and Thomas J. Sargent
8. Finite-Horizon Learning, William Branch, George Evans and Bruce McGough
9. Regime Switching, Monetary Policy, and Multiple Equilibria, Jess Benhabib
10. Too Many Dragons in the Dragons' Den, Martin Ellison and Chryssi Giannitsarou
11. The Impacts of Labor Taxation Reform Under Heterogeneous Domestic Labour Markets and Flexible Outsourcing, Erkki Koskela

Macroeconomics at the Service of Public Policy

Edited by Thomas J. Sargent and Jouko Vilmunen

Author Information

Thomas J. Sargent joined New York University as the first W.R. Berkley Professor in September 2002. He was awarded the 2011 Nobel Prize in Economics, shared with Princeton University's Christopher Sims, for his empirical research on cause and effect in the macroeconomy. Professor Sargent was a professor of economics at the University of Minnesota (1975- 87), the David Rockefeller Professor at the University of Chicago (1992- 98), and the Donald Lucas Professor of Economics at Stanford University (1998- 2002). He has been a senior fellow at the Hoover Institution since 1987. He earned his Ph.D. from Harvard University and was a first lieutenant and captain in the US Army. He was elected a fellow of the National Academy of Sciences and a fellow of the American Academy of Arts and Sciences. He is past president of the Econometric Society, the American Economic Association, and the Society for Economic Dynamics. Among his books is 'Robustness' (with L. P. Hansen, Princeton University Press, 2008).

Jouko Vilmunen is Head of Research at the Bank of Finland. He joined the Bank in 1988, after working as a lecturer in the Department of Economics at the University of Helsinki. Dr Vilmunen gained his PhD in 1992, after which he entered the research department of the Bank of Finland as a research supervisor. In 1994, he joined the European Commission as a national expert. In addition to his position at the Bank of Finland, Dr Vilmunen also gives lectures at universities and business schools, including lectures on monetary policy at the University of Helsinki, and open economy macroeconomics at the School of Business, Aalto University.

Contributors:

Kenneth Arrow, Stanford University
Jess Benhabib, New York University and Paris School of Economics
William Branch, University of California, Irvine
In-Koo Cho, University of Illinois
Martin Ellison, University of Oxford and Bank of Finland
David Evans, New York University
George Evans, University of Oregon and University of St. Andrews
Chryssi Giannitsarou, University of Cambridge and CEPR
Seppo Honkapohja, Bank of Finland
Kenneth Kasa, Simon Fraser University
Erkki Koskela, Helsinki University
Bruce McGough, Oregon State University
Kaushik Mitra, University of St. Andrews
Thomas J. Sargent, New York University and Hoover Institution
Hans-Werner Sinn, Ifo Institute for Economic Research
Jouko Vilmunen, Bank of Finland
Noah Williams, University of Wisconsin, Madison