What Will Be the New Economic Paradigm?

Matt Yglesias has a great post over at Moneybox (paragraph breaks added):

The need for regime change.

… The Depression discredited the gold standard and a whole set of related notions.

The Great Inflation discredited ideas about the Phillips Curve …

We had, until recently, the Great Moderation Consensus that … the Federal Reserve has the ability to stabilize the macroeconomy by fiddling with interest rates.

Well now here we are and the Federal Reserve can’t stabilize the macroeconomy by fiddling with interest rates.

That calls for the creation of a new regime.

I’ve dumbed it down a bit here. He also talks about employment, for instance, including this great line:

…if the government isn’t abandoning the idea of full employment then they have a mighty strange way of showing it.

But I think I’ve imparted the main question. We’ve been or are going through a paradigm-falsifying “moment.” (As always, some good thinking will be cast aside along with some bad.)

What will move into the vacuum left by the (at least partially) ravaged Great Moderation paradigm?

Courtesy of David Beckworth and The Kauffman Foundation (PDF), here’s how econobloggers would like that question to be answered (thanks, FTA, for the great question):

Personally, I fondly envision some coherent amalgam of the M&M gang: Market Monetarists (NGDPers) and Modern Monetary Theorists (with a decent dose of the Austrian’s insight into real-economy production and productivity). I’m guessing that some have already ventured (some parts of) this amalgamation, quite possibly in posts I’ve already read and since forgotten. Thoughts? Links?

(Even as I post this I find that vimothy, JKH, and Steve Randy Waldman are worrying productively at parts of this very question in the comments here.)

Cross-posted at Angry Bear.







6 responses to “What Will Be the New Economic Paradigm?”

  1. Detroit Dan Avatar
    Detroit Dan

    The Modern Monetarists seem to offer continued obfuscation. Much of the problem with the current paradigm is that the workings of the monetary system are obscured with layers of unnecessary complexity and invalid assumptions. Along come the Modern Monetarists to tell us that if the Fed targets nominal GDP, that will solve our problems. This reinforces the invalid assumption that the Fed controls the money supply and therefore can print money to stimulate the economy. It explicitly aims to change expectations based upon such nonsense. The actual policies which the Modern Monetarists would advocate for the Fed to implement to achieve increases in nominal GDP are hazy at best. Recently, one prominent monetary monetarists (Nick Rowe, I believe) has advocated fiscal policy by the Fed, or something. I just don’t see what they bring to the table but more of the same…

  2. Asymptosis Avatar

    @Detroit Dan “The actual policies which the Modern Monetarists would advocate for the Fed to implement to achieve increases in nominal GDP are hazy at best.”

    Yeah I’ve searched Sumner/Beckworth trying to discover what the Fed *should* have done in summer/fall 2008. Haven’t found it. I assume buying bonds etc.

    Now it seems possible to me that OMOs at non-ZLB (and absent IORs) could have been more effective.

    Which raises my question:

    In the MMT paradigm, what explains the Great Moderation? Have effective discretionary OMOs been responsible for low and steady inflation over decades?

  3. Detroit Dan Avatar
    Detroit Dan

    Globalization and the resulting low wages explains low inflation, if that’s what you mean by the Great Moderation. The Fed has been following inflation trends for the most part, not setting them, in my opinion…

  4. Asymptosis Avatar

    @Detroit Dan “Globalization and the resulting low wages explains low inflation”

    Excellent surmise. Thank you. I’m kind of amazed that I’ve never come across that explanation — or it’s never registered, in any case.

    More and better policing aren’t what caused the decline in crime, as practitioners of policing would have you believe. Rather:


  5. Dunce Cap Aficionado Avatar
    Dunce Cap Aficionado


    @Detroit Dan

    I have prodded for answers to these questions over at TPC in the forum, no one can say what their proposed transmission mechanism would be to target nGDP. Being that they are monetarists and have not offered any specific mechanism, one can only assume they would propose some form of QE… :/

    Perhaps the Market Monetarists should start here-