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James "Jim" Melenkevitz PhD

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Date
2022/09/22
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2
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Graduate school to current | COMPUTER SKILLS
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As a follow-up to my previous post, I found the graph below that I used ten years ago to illustrate how standard models struggled to capture what was going on after 2008. As for inflation today, models then predicted every year that the situation would improve, only to be disproved by reality.  I was therefore very excited to read Olivier Blanchard’s 2014 piece “Where Danger Lurks”, in which he called for a rekindling of macroeconomic models. He wrote in particular  “We in the field did think of the economy as roughly “linear”, constantly subject to different shocks, constantly fluctuating, but naturally returning to equilibrium over time. […] The problem is that we came to believe that this was indeed the way the world worked. […] The main lesson of the crisis is that we were much closer to “dark corners”—situations in which the economy could badly malfunction —than we thought.” The crucial sentence here of course is “naturally returning to equilibrium”. All these classical models can only predict that the system will return to equilibrium – there is nothing else it can do! This contrasts with more realistic frameworks (like Agent Based Models) where multiple equilibrium states can coexist, with tipping points separating them (probably what O. Blanchard calls “dark corners”, although only implicitly).  Alas, when I met Olivier Blanchard a little later in his IMF office, he told me – somewhat dispirited – “well, the economy is now back on tracks, and the appetite for new economic thinking is already fading away. Macroeconomics will revert to business as usual”. The problem, in my view, lies in what Willem Buiter (ex. Bank of England) said in his own 2008 piece “The unfortunate uselessness of most 'state of the art' academic monetary economics”: “Research tends to be motivated by the internal logic, intellectual sunk capital and aesthetic puzzles of established researc
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https://www.linkedin.com/feed/update/urn:li:activity:6978165929935282176
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https://www.linkedin.com/in/james-jim-melenkevitz-phd-17b941b5/
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