Must-Read: Simon Wren-Lewis: Macro Teaching and the Financial Crisis

Simon Wren-Lewis: Macro Teaching and the Financial Crisis: “We end up with textbooks that still have the completely out of date LM curve at their heart (and associated AD curves, plus Mundell Fleming, and even money multipliers)…

…but additional chapters where the AS curve becomes a Phillips curve, and money targeting gives way to Taylor rules. The student ends up totally confused, if they ever get to those later chapters. And after the financial crisis, a new edition will have a chapter devoted to that crisis, but not much in earlier chapters will change. This is not the case with the third textbook by Wendy Carlin and David Soskice… a complete rewrite of their earlier ‘Macroeconomics: Imperfections, Institutions, and Policies’. Luckily all the features of that earlier book that I really liked are retained… a supply side based on imperfect competition… a core model (the 3 equation model) which dispenses with the LM curve, and replaces it with a ‘monetary rule’ curve… open economy analysis is now fully integrated with the 3 equation model…. But by far the most important change… [is] three chapters on the financial sector… banking… a wedge between the ‘policy’ interest rate and the interest rate relevant for the IS curve…. how the financial system can be a source of instability… the financial crisis of 2008…. Mark Gertler on the back cover writes: ‘This is an exciting new textbook. Overall, it confirms my belief that macroeconomics is alive and well’. That pretty well sums up my reaction.

April 14, 2015

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