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TAKING SERIOUSLY FINANCE Macroeconomics after the crisis. Robert BOYER Conference “Toward an alternative macroeconomic analysis of microfoundations , finance-real economy dynamics and crises”, Budapest, September 6-8 th , 2010. INTRODUCTION. The core arguments of this presentation
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TAKING SERIOUSLY FINANCEMacroeconomics after the crisis Robert BOYER Conference “Toward an alternative macroeconomic analysis of microfoundations, finance-real economy dynamics and crises”, Budapest, September 6-8th, 2010
INTRODUCTION • The core arguments of this presentation • The failure of contemporary macro-modeling dates back to the inadequate formalization of General Theory • The irrelevance has been widening with the neo-Walrasian conception embedded into RBC and DSGE models • This is especially detrimental since the present crisis largely originated from a cluster of financial innovations with a large destabilizing role at the macro level
There is an opportunity for developing new macroeconomic paradigms that would build upon: • An updating of political economy analyses of financial crises • A clear compatibility with the major stylized facts exhibited by the history of financial crises • The formalization of some robust mechanisms linking finance to economic activity.
The presentation proposes at least four strategies: Modeling the contemporary finance-led regimes within an institutional macro theory Formalizing the resilience and crisis of financial networks Extending a model of stock market bubbles to the banking system and the real economy Learning and forgetting the origins of crises at the micro and institutional levels.
I. The failure of contemporary macro-modeling dates back to the inadequate formalization of General Theory
II. The irrelevance has been widening with the neo-Walrasian conception embedded into RBC and DSGE models
Table 1 – From the failures of DSGE models to new research agenda
III. This is especially detrimental since the present crisis largely originated from a cluster of financial innovations with a large destabilizing role at the macro level
Figure 2 – The recurrence of bubbles and financial crises: a synthetic index
Figure 3 – Growth of Assets of Four Sectors in the United States (March 1954 = 1) (Log scale) (source: Federal Reserve, Flow of Funds, 1954-2009)
Figure 4 – Household Sector Leverage and Total Assets (Source: U.S. Flow of Funds, Federal Reserve, 1963-2007)
Figure 5 – Broker Dealer Sector Leverage and Total Assets(Source: U.S. Flow of Funds, Federal Reserve, 1963-2007)
Table 2 – Various research programs facing the major stylized facts revealed by the present crisis
IV.An updating of political economy analyses of financial crises
V.Taking into account some robust mechanisms linking finance to economic activity
The procyclicity of credit and economic activity Figure 6 – US Private Demand Growth and the Credit impulse
The Yield Curve and Future Economic Activity • Figure 7 – Forecasted probability of recession based on the slope of the yield curve 4 quarters earlier
The related Mechanisms: Impact upon the Shadow Banks Credit Supply via Profitability Table 3 – A macro financial intermediary VAR, US 1990 Q3 – 2008 Q3
The impact of financial wealth upon the real economy Figure 8 – U.S. stock market and productive investment (% of GDP)
Figure 9 – U.S. Firms debt and stock market valuation (% of GDP)
Figure 10 – U.S.: total debt and financial and real estate wealth of household (% of real disposable income)
Figure 11 – U.S.: Total subprime credit (billion dollars) and housing prices (100 = 2002.1)
VI.Modeling the contemporary finance-led regimes within an institutional macro theory
Figure 12 – An institutionally grounded macro modeling: A given configuration of a capitalist economy
Figure 13 – The Channels of finance to real economy in the era of finance led capitalism
VII. Formalizing the resilience and crisis of financial networks
Source: Gai Prasanna, and Sujit Kapadia (2010), p. 11, 22, 24.
VIII. Two other strategies • Extending a model of stock market bubbles to the banking system and the real economy • Learning and forgetting the origins of crises at the micro and institutional levels.
CONCLUSION C1 – The present crisis has revealed the many structural deficiencies of DSGE models: representative agent hypothesis, full rationality,…. C2 – Nevertheless its main weakness might well be the absence of a fully fledged financial system. C3 – This has been taking into account by the most recent researches within the DSGE paradigm. Can it succeed?
Table 4 – Recent extensions of GSGE models: at last “Banks matter”
C4 – The neo-Walrasian legacy of these models makes problematic the rescue of the DSGE approach: basic neutrality of money and underlying hypothesis of financial markets efficiency. C5 – This opens an opportunity for the emergence of old and new alternative paradigms but there are many of them. C6 – A discriminating criteria should be their respective ability to incorporate the basic mechanisms linking finance to real economy, while reproducing the major stylized facts exhibited by long run history of financial crises.
C7 – A possible dilemma: The search for a quite general model that could fit with all the previous financial crises, only the value of some parameters A special model coping with the specificities of the present crisis: the clustering of powerful financial innovations with strong negative externalities upon macroeconomic stability.
Thanks for your attention and patience Robert BOYER CEPREMAP 140, Rue du Chevaleret 75013 PARIS (France) + 33 (0)1 40 77 84 12 robert.boyer@ens.fr Site WEB : http://www.jourdan.ens.fr/~boyer/