The rebuilding macroeconomic theory project part II: multiple equilibria, toy models, and policy models in a new macroeconomic paradigm

by David Vines and Samuel Wills

Three years ago, Oxford economics professor David Vines started leading the effort “to rebuild macroeconomic theory”. While this effort was much needed after the failure of macroeconomic modelling became apparent in the wake of the 2008 financial crisis, many were sceptic that this Oxford research program could actually achieve the transformation of macroeconomics. Indeed, FT commentator Martin Sandbu critiqued the contributors of the first issue of Rebuilding Macroeconomic Theory that they would only patch some more realistic behavioural assumptions onto the single-equilibrium model and that they didn’t go far enough in critiquing the standard macro models. Last month, Sandbu was therefore happy to see that in the lead article of the second issue of the project, Oxford economists David Vines and Samuel Wills pushed for “a multiple-equilibrium and diverse paradigm — the MEADE paradigm.“ The new paradigm should “emphasize that economies can have more than one stable outcome, and study why.“ We know that a shift in belief can shift one equilibrium to another at least since George Soros “broke the Bank of England”. We therefore welcome the authors proposal for a new paradigm.

Monetary Policy and Racial Inequality

by Alina Bartscher, Moritz Kuhn, Moritz Schularick and Paul Wachtel

Over the last weeks, there has been a fierce discussion on the future role of central banks. Many renowned economists like Bradford DeLong, Barry Eichengreen and Marcel Fratzscher have called for a widening of central banks’ mandate to assume other responsibilities. Our partners over at Transformative Responses have just held a whole conference on whether central banks should use their powers to tackle such grand problems as climate change or inequality that go beyond the traditional mandate of price stability. In the midst of this heated discussion, our academic partner Moritz Schularick and his colleagues came out with this fantastic paper about the effects of Federal Reserve policy on the racial inequality in the United States. Findings: “[…] although a more accommodative monetary policy increases employment of black households more than white households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value.”

If current central bank policy exacerbates inequality, then it might indeed be the time to rethink their responsibilities and mandates.

Revolution without Revolutionaries: Interrogating the Return of Monetary Financing

by Daniela Gabor

The report by Daniela Gabor that was presented at the Transformative Responses conference on Next Generation Central Banking critically analyzes the current system of central bank independence. Gabor argues that monetary financing – central banks buying large amounts of government debt – has returned and is likely here to stay. Now it needs a framework for ‘cooperation without subordination’ where governments and central banks fight societal challenges together. “What is needed […] is a framework for coordination with fiscal authorities that re-embeds money and credit in the pursuit of the common good, and that is tailored to green and health-friendly objectives.“ The paper was published as one of three policy papersfor the Next Generation Central Banking conference. You can watch the author discuss the paper with two central bankers here.

A must-read for anyone interested in critical macro-finance.

The Future of the Automotive Industry: Dangerous Challenges or New Life for a Saturated Market?

by Annamaria Simonazzi, Jorge Carreto Sanginés, and Margherita Russo

There is no doubt that the automotive industry is currently undergoing a radical transformation. In a seminar on 24 February, we are discussing the technological and economic challenges that the auto industry faces with renowned experts. Timely enough for our work at the Forum, a recent working paper has just been published by our partners, the Institute for New Economic Thinking (INET). We highly recommend the paper and the blog post of Annamaria Simonazzi and her Italian colleagues, if you want to learn more about how the transformation of the automotive industry will affect the distribution of employment, the regionalisation of production and the dynamic evolution of the comparative advantage of nations.

Have Robots Taken All Our Jobs Before? The Case of Mechanization in US Agriculture  

by Emily M. Eisner

There is no doubt that technological progress improves human wellbeing in the long run. But machines can hurt workers by displacing them in the short run. As Carpetti and Voth (2020) have shown, this can lead to extreme rioting as was the case in the notorious “Captain Swing” riots in 1830s England. Recent research has also shown that new technologies, such as robots and automation, are a big driver of the increasing inequality (Südekum et al., 2020, Moll et al. 2021). But are all workers affected equally by the adoption of robots? A new paper by young Berkley economist Emily M. Eisner looks precisely at the effects on individual workers by studying the impact of the tractor on US farmers. Their results show that the older the farmer, the more likely he is to be displaced by the new technology and drop out of the labor market. This is highly relevant for today, as Eisner shows in a recent blog post on the technological change spurred by COVID-19. Their point: The rapid adoption of new technologies such as Zoom that enabled teleworking hurt old workers more than the young. Or as Eisner writes: “A good change (working from home to save lives during a pandemic) can find the cracks in our system and do harm (in this case, reducing job security for older workers). Studying this technological change will help us identify these issues, and bolster the gaps.” We agree and recommend everyone to keep an eye on Eisner’s research.