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The Hedgehog and the Fox: From DSGE to Macro‐Pru
Author(s) -
Miller Marcus,
Zhang Lei
Publication year - 2015
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12119
Subject(s) - dynamic stochastic general equilibrium , economics , inflation (cosmology) , externality , macro , financial crisis , financial stability , macroeconomics , appeal , monetary economics , deflation , keynesian economics , monetary policy , microeconomics , financial system , physics , theoretical physics , computer science , law , political science , programming language
Prior to the financial crisis of 2008/9, DSGE models‐without‐money set a new standard in applied macroeconomics; and they were widely adopted by C entral B anks to help achieve their inflation targets. Controlling inflation did not deliver financial stability, however: far from it. The appeal of macro‐models based on ‘efficient financial markets’ surely contributed to over‐confidence before the crisis. But what about externalities? We examine, in particular, how steps to mitigate microeconomic principal/agent problems can create macroeconomic externalities—‘financial accelerators’ that affect balance sheets in pro‐cyclical fashion. Now is the time, we argue, to embrace such a wider perspective.