Big Ideas in Macroeconomics: A Nontechnical View by Kartik B. Athreya

By Kartik B. Athreya

Macroeconomists were caricatured both as credulous savants in love with the wonderful thing about their mathematical types or as free-market fundamentalists who admit without doubt as to the market's knowledge. during this ebook, Kartik Athreya attracts a more true photo, providing a nontechnical description of sought after rules and types in macroeconomics, and arguing for his or her price as interpretive instruments in addition to their coverage relevance. Athreya intentionally leaves out the technical equipment, offering an important advisor to the occasionally summary rules that force macroeconomists' study and sensible coverage advice.

Athreya describes the most method of macroeconomic version building, the foundational Walrasian general-equilibrium framework, and its smooth model, the Arrow-Debreu-McKenzie (ADM) version. within the center of the ebook, Athreya indicates how the Walrasian method shapes and unifies a lot of contemporary macroeconomics. He info versions primary to ongoing macroeconomic analyses: the neoclassical and stochastic progress versions, the normal incomplete-markets version, the overlapping-generations version, and the general seek version. Athreya's available primer strains the hyperlinks among the perspectives and coverage recommendation of recent macroeconomists and their shared theoretical approach.

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An ADM model with firms that faced no problems with financing, or banks modeled in a limited manner, would provide no insight, because it would fail to predict that managers would have the contracts we routinely observe them as having. By contrast, a setting in which the costs of contracting was in part what gave rise to the kinds of incentive plans for managers we observe might be more helpful for answering the question. Nonetheless, at the end of the day, production in most market economies does take place under the aegis of a firm of one sort or another, and the focus of the ADM model is to incorporate this fact in as simple a manner as possible.

The Modern Macroeconomic Approach 23 Given the equilibrium model chosen, the final part of step 4 is, in many cases, to evaluate the change in well-being of households. In all models that follow steps 1–4, this is readily done. Both the author and the reader are clearly informed about the benefits or costs flowing to various participants in the model. With this information, one can arrive at a meaningful judgment of how to act vis-à-vis the policy. I have now described the structure for arguments that is essentially mandated by my profession.

4 Macroeconomic “Equilibrium”: What It Does and Does Not Imply “Equilibrium” is a term that seems to cause great confusion, with many taking macroeconomists’ focus on “equilibrium states” as a tacit admission that complicated and violent changes in outcomes are inherently inconsistent with any notion of equilibrium—or, worse yet, that private outcomes are somehow always for the best. Both views are incorrect. Later in the book, I will emphasize the yawning gap that may exist between an “equilibrium” outcome in a given model, on the one hand, and both an “ideal” outcome and a “stable” one, on the other.

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