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Noah Smith

Economics Gets Sucked Into Dark Corners

Economists have developed all sorts of models to describe how the economy functions under an array of different conditions, though no one is sure when a specific model is relevant to economic conditions.
A little sunshine, please.                                                      
A little sunshine, please.                                                      

Olivier Blanchard, the International Monetary Fund's chief economist and a leading inventor of modern macroeconomic theory, is known as one of the field's gentler critics. In 2008 he wrote a famously ill-timed paper declaring that "The state of macro is good." The biggest financial crisis since the Great Depression followed soon after. In that paper, Blanchard presented New Keynesian models -- which he had a big hand in developing -- as the dominant approach; at the same time, two prominent macroeconomists at the Federal Reserve Bank of Minneapolis were releasing a paper declaring those models "not yet useful for policy analysis!"

So it's little surprise that Blanchard's latest critique of macro is a bit of a softball. Blanchard generally praises the "hundred flowers" that have bloomed in the field since the triumphs he praised in 2008 blew up. He is also happy that macro models have started to include finance (a bit belatedly, perhaps). And he believes that standard macro models can still provide policy makers with a lot of insight -- as long as we stay away from the "dark corners" where things like financial collapses cause the models to collapse as well: