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ught has been dubbed the new neoclassical synthesis 34 35 these models are now used by many central banks and are a core part of contemporary macroeconomics 8 535 36 2008 financial crisis edit the 2008 financial crisis and the subsequent great recession were the first events to lead to a major reassessment of macroeconomics this field had generally neglected the specific role of financial institutions in the economy after the crisis macroeconomic researchers have turned their attention to several new directions the financial system and the nature of macro financial linkages and frictions studying leverage liquidity and complexity problems in the financial sector the use of macroprudential tools and the dangers of an unsustainable public debt 8 537 36 increased emphasis on empirical work as part of the so called credibility revolution in economics using improved methods to distinguish between correlation and causality to improve future policy discussions 37 interest in understanding the importance of heterogeneity among the economic agents leading among other examples to the construction of heterogeneous agent new keynesian models hank models which may potentially also improve understanding of the impact of macroeconomics on the income distribution 38 understanding the implications of integrating the findings of the increasingly useful behavioral economics literature into macroeconomics 39 and behavioral finance growth models edit research in the economics of the determinants behind long run economic growth has followed its own course 40 the harrod domar model from the 1940s attempted to build a long run growth model inspired by keynesian demand driven considerations 41 the solow swan model worked out by robert solow and independently trevor swan in the 1950s achieved more long lasting success however and is still today a common textbook model for explaining economic growth in the long run 42 the model operates with a production function where national output is the product of two inputs capital and labor the solow model assumes that labor and capital are used at constant rates without the fluctuations in unemployment and capital utilization commonly seen in business cycles 43 in this model increases in output i e economic growth can only occur because of an increase in the capital stock a larger population or technological advancements that lead to higher productivity total factor productivity an increase in the savings rate leads to a temporary increase in output as the economy builds more capital however eventually the depreciation rate will limit capital expansion savings will be used to replace depreciated capital leaving none to pay for additional expansion solow s model suggests that economic growth measured by output per capita depends solely on technological advances that enhance productivity 44 the solow model can be interpreted as a special case of the more general ramsey growth model where households savings rates are not constant as in the solow model but derived from an explicit intertemporal utility function in the 1980s and 1990s endogenous growth theory arose to challenge the neoclassical growth theory of ramsey and solow this group of models explains economic growth through factors such as increasing returns to scale in capital and learning by doing that are endogenously determined rather than the exogenous technological improvement used to explain growth in solow s model 45 another type of endogenous growth model endogenizes technological progress by explicitly modelling research and development activities of profit maximizing firms 10 280 308 climate change in macroeconomics edit natural resources flow through the economy and end up as waste and pollution since the 1970s various environmental problems have been integrated into macroeconomic models particularly growth models to study the implications of resource scarcity and global climate change for aggregate economic outcomes the earliest work tackling the former question of scarcity was presented in william jevons s 1865 book the coal question in which he postulates a paradox whereby productivity improvements may accelerate scarcity in a growing economy during the oil crises of the 1970s when scarcity problems of natural resources were high on the public agenda economists like joseph stiglitz and robert solow introduced non renewable resources into neoclassical growth models to study the possibilities of maintaining growth in living standards under these conditions 10 201 39 in 2006 economist nicholas stern published the first comprehensive analysis of the global damages to the economy as a result of projected climate change scenarios in the stern review 46 this paper was the first to develop a model to assess the impact of slow on set climate change on gdp more recently the issue of climate change and the possibilities of a sustainable development are examined in so called integrated assessment models iams pioneered by william nordhaus 47 the use of iams is now widespread in climate economics and is used to get both disaggregated regional assessment of damages or global damages under different policy scenarios more theoretically macroeconomic models in environmental economics model a system in which production takes natural resources such as land water or energy as inputs in this case one example of an integrated model would replace the circular flow of income diagram may be replaced by a more complex flow diagram reflecting the input of solar energy which sustains natural inputs and environmental services which are then used as units of production such as the early work of herman daly 48 once consumed natural inputs pass out of the economy as pollution and waste the potential of an environment to provide services and materials is referred to as an environment s source function and this function is depleted as resources are consumed or pollution contaminates the resources the sink function describes an environment s ability to absorb and render harmless waste and pollution when waste output exceeds the sink s capacity long term damage occurs 49 8 many methods for national accounting that include environmental goods and services as components of economic output remain under discussion 50 heterodox macroeconomics edit other branches of macroeconomics that resist mainstream macroeconomic theories are broadly classified as heterodox macroeconomics this discipline includes the aforementioned ecological economics modern monetary theory marxian economics and other schools of thought that build on theoretical traditions beyond neoclassical or keynesian works for example heterodox economists see the driver of economic instability as price flexibility rather than price stickiness and therefore develop models with different assumptions and structures 51 austrian school macroeconomics edit the austrian school approaches macroeconomics from a distinct methodological standpoint following ludwig von mises human action austrians generally adopt praxeology a deductive method that treats economics as a science of purposeful individual action rather than human design 52 on this basis austrian economists have objected to the core tools of mainstream economics arguing that aggregate variables such as national output or general price levels mask the structural composition of an economy obscuring the underlying heterogenous capital structure subjective values prices and individual preferences that microeconomic decisions are based on citation needed the best known substantive contribution of the school is the austrian business cycle theory abct developed by mises and elaborated by hayek a contemporary of keynes macroeconomic policy edit the division into various time frames of macroeconomic research leads to a parallel division of macroeconomic policies into short run policies aimed at mitigating the harmful consequences of business cycles known as stabilization policy and medium and long run policies targeted at improving the structural levels of macroeconomic variables 10 18 stabilization policy is usually implemented through two sets of tools fiscal and monetary policy both forms of policy are used to stabilize the economy i e limiting the effects of the business cycle by conducting expansive policy when the economy is in a recession or contractive policy in the case of overheating 8 53 structural policies may include labour market policies that aim to change the structural unemployment rate or policies that affect long run propensities to save invest or engage in education research and development 10 19 monetary policy edit further information monetary policy central banks conduct monetary policy mainly by adjusting short term interest rates 54 the actual method through which the interest rate is changed differs from central bank to central bank but typically the implementation happens either directly via administratively changing the central bank s own offered interest rates or indirectly via open market operations 55 via the monetary transmission mechanism interest rate changes affect investment consumption asset prices like listed companies shares prices and house prices and through exchange rate reactions export and import in this way aggregate demand employment and ultimately inflation are affected 56 expansionary monetary policy lowers interest rates increasing economic activity whereas contractionary monetary policy raises interest rates in a fixed exchange rate system interest rate decisions together with direct intervention by central banks in exchange rate dynamics are major tools for controlling the exchange rate 57 in developed countries most central banks follow inflation targeting focusing on keeping medium term inflation close to an explicit target say 2 or within an explicit range this includes the federal reserve and the european central bank which are generally considered to follow a strategy very close to inflation targeting even though they do not officially label themselves as inflation targeters 58 in practice an official inflation targeting often leaves room for the central bank to also help stabilize output and employment a strategy known as flexible inflation targeting 59 most emerging economies focus their monetary policy on maintaining a fixed exchange rate regime aligning their currency with one or more foreign currencies typically the us dollar or the euro 60 conventional monetary policy can be ineffective in situations such as a liquidity trap when nominal interest rates are near zero central banks cannot loosen monetary policy through conventional means in that situation they may use unconventional monetary policy such as quantitative easing to help stabilize output quantity easing can be implemented by buying not only government bonds but also other assets such as corporate bonds stocks and other securities this allows lower interest rates for a broader class of assets beyond government bonds a similar strategy is to lower long term interest rates by buying long term bonds and selling short term bonds to create a flat yield curve known in the us as operation twist 61 fiscal policy edit further information fiscal policy fiscal policy is the use of the government s revenue taxes and expenditure as instruments to influence the economy for example if the economy is producing less than potential output government spending can be used to employ idle resources and boost output or taxes could be lowered to boost private consumption which has a similar effect government spending or tax cuts do not have to make up for the entire output gap there is a multiplier effect that affects the impact of government spending for instance when the government pays for a bridge the project not only adds the bridge s value to output but also enables bridge workers to increase their consumption and investment helping close the output gap the effects of fiscal policy can be limited by partial or full crowding out when the government undertakes spending projects it limits the resources available to the private sector full crowding out occurs in the extreme case when government spending replaces private sector output rather than adding to the economy s output a crowding out effect may also occur if government spending raises interest rates thereby limiting investment 62 some fiscal policy is implemented through automatic stabilizers without any active decisions by politicians automatic stabilizers do not suffer from the policy lags of discretionary fiscal policy automatic stabilizers use conventional fiscal mechanisms but take effect as soon as the economy takes a downturn spending on unemployment benefits automatically increases when unemployment rises and tax revenue decreases which shelters private income and consumption from part of the fall in market income 10 657 comparison of fiscal and monetary policy edit there is a consensus that both monetary and fiscal instruments may affect demand and activity in the short run i e over the business cycle 10 657 economists usually favor monetary over fiscal policy to mitigate moderate fluctuations however because it has two major advantages citation needed first monetary policy is generally implemented by independent central banks instead of the political institutions that control fiscal policy independent central banks are less likely to be subject to political pressure to pursue overly expansionary policies second monetary policy may suffer shorter inside lags and outside lags than fiscal policy 53 there are some exceptions however firstly in the case of a major shock monetary stabilization policy may not be sufficient and should be supplemented by active fiscal stabilization 10 659 secondly in the case of a very low interest level the economy may be in a liquidity trap in which monetary policy becomes ineffective which makes fiscal policy the more potent tool to stabilize the economy 8 thirdly in regimes where monetary policy is tied to fulfilling other targets in particular fixed exchange rate regimes the central bank cannot simultaneously adjust its interest rates to mitigate domestic business cycle fluctuations making fiscal policy the only usable tool for such countries 57 macroeconomic models edit further information macroeconomic model macroeconomic teaching research and informed debates normally evolve around formal diagrammatic or equational macroeconomic models to clarify assumptions and show their consequences precisely models include simple theoretical models often containing only a few equations used in teaching and research to highlight key basic principles and larger applied quantitative models used by e g governments central banks think tanks and international organisations to predict effects of changes in economic policy or other exogenous factors or as a basis for making economic forecasting 63 well known specific theoretical models include short term models like the keynesian cross the is ...
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