Working Paper: NBER ID: w7550
Authors: Olivier Blanchard
Abstract: The answer to the question in the title is: A lot. In this essay, I argue that the history of macroeconomics during the 20th century can be divided in three epochs: Pre 1940. A period of exploration, where macroeconomics was not macroeconomics yet, but monetary theory on one side, business cycle theory on the other. A period during which all the right ingredients, and quite a few more, were developed. But also a period where confusion reigned, because of the lack of an integrated framework. From 1940 to 1980. A period of consolidation. A period during which an integrated framework was developed starting with the IS-LM, all the way to dynamic general equilibrium models and used to clarify the role of shocks and propagation mechanisms in fluctuations. But a construction with an Achille's heel, namely too casual a treatment of imperfections, leading to a crisis in the late 1970s. Since 1980. A new period of exploration, focused on the role of imperfections in macroeconomics, from the relevance of nominal price setting, to incompleteness of markets, to asymmetric information, to search and bargaining in decentralized markets. Exploration often feels like confusion. But behind it may be one of the most productive periods of research in macroeconomics.
Keywords: No keywords provided
JEL Codes: B12; B22; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Pre-1940 exploration (N51) | 1940-1980 consolidation (E65) |
| 1940-1980 consolidation (E65) | improved understanding of macroeconomic dynamics (E39) |
| Difference between natural rate of interest and money rate (E43) | integration of monetary theory with business cycle theory (E39) |
| Nominal wage and price setting, market incompleteness, and asymmetric information (D52) | macroeconomic outcomes since 1980 (E65) |
| Shift in focus since 1980 (E65) | significant advancements in research (O32) |