Monday, January 20, 2003

What comes next in Macro?

I'm taking Macroeconomics this winter, and hope to take Advanced Macro in the spring. My big takeaway so far is that no one understands how macro works because no one knows what the elasticity is between, say, demand for government borrowing (deficits) and supply of money. All the differences between monetarists, neo-classicist, Keynesians etc. boils down to different assumptions about underlying elasticities.

This article on U Chicago's Robert Lucas does a great job of pointing out the strides made in monetary policy and outlines the next research agenda: fiscal policy.

Milton Friedman, who's kinda like the Yoda of Economics, says deficits are the only thing to control spending. Given how deep the financial hole US states have found themselves in, he could well be right, but deficits are also a blunt and messy instrument and it would be nice to find better ways to control government spending.

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