TAKING SERIOUSLY TAKING SERIOUSLY FINANCEFINANCE

Macroeconomics after Macroeconomics after the crisisthe crisisRobert BOYER

Conference “Toward an alternative Conference “Toward an alternative macroeconomic analysis of macroeconomic analysis of

microfoundations, finance-real microfoundations, finance-real economy dynamics and crises”, economy dynamics and crises”,

Budapest, September 6-8Budapest, September 6-8thth, 2010, 2010

INTRODUCTIONINTRODUCTION

• The core arguments of this presentationThe The failure failure of contemporary macro-of contemporary macro-

modeling dates back to the modeling dates back to the inadequate inadequate formalization of General Theoryformalization of General Theory

The irrelevance has been widening with The irrelevance has been widening with the the neo-Walrasian conceptionneo-Walrasian conception embedded embedded into RBC and DSGE modelsinto RBC and DSGE models

This is especially detrimental since the This is especially detrimental since the present crisis largely originated from present crisis largely originated from a a cluster of financial innovationscluster of financial innovations with a with a large destabilizing role at the macro large destabilizing role at the macro level level

There is an opportunity for developing There is an opportunity for developing new macroeconomic paradigmsnew macroeconomic paradigms that that would build upon:would build upon:

An updating of political economy analyses An updating of political economy analyses of financial crisesof financial crises

A clear compatibility with the major A clear compatibility with the major stylized facts exhibited by the history of stylized facts exhibited by the history of financial crisesfinancial crises

The formalization of some robust The formalization of some robust mechanisms linking finance to economic mechanisms linking finance to economic activity.activity.

The presentation proposes at least The presentation proposes at least four strategies:four strategies:Modeling the contemporary finance-led Modeling the contemporary finance-led regimes within an institutional macro regimes within an institutional macro theorytheory

Formalizing the resilience and crisis of Formalizing the resilience and crisis of financial networksfinancial networks

Extending a model of stock market bubbles Extending a model of stock market bubbles to the banking system and the real economyto the banking system and the real economy

Learning and forgetting the origins of crises Learning and forgetting the origins of crises at the micro and institutional levels. at the micro and institutional levels.

I. I. The failure of The failure of contemporary contemporary

macro-modeling macro-modeling dates back to the dates back to the

inadequate inadequate formalization of formalization of General TheoryGeneral Theory

Figure 1 – Half a century in macroeconomic theorizing

II. II. The irrelevance The irrelevance has been widening has been widening

with the neo-with the neo-Walrasian Walrasian conception conception

embedded into RBC embedded into RBC and DSGE modelsand DSGE models

Table 1 – From the failures of DSGE models to new research agenda

III. III. This is especially This is especially detrimental since detrimental since the present crisis the present crisis largely originated largely originated from a cluster of from a cluster of

financial innovations financial innovations with a large with a large

destabilizing role at destabilizing role at the macro levelthe macro level

Figure 2 – The recurrence of bubbles and financial crises: a synthetic index

Figure 3 – Growth of Assets of Four Sectors in the United States (March 1954 = 1) (Log

scale) (source: Federal Reserve, Flow of Funds, 1954-2009)

Figure 4 – Household Sector Leverage and Total Assets (Source: U.S. Flow of Funds,

Federal Reserve, 1963-2007)

Figure 5 – Broker Dealer Sector Leverage and Total Assets

(Source: U.S. Flow of Funds, Federal Reserve, 1963-2007)

Table 2 – Various research programs facing the major stylized facts revealed by the

present crisis

IV.IV. An updating of An updating of political economy political economy

analyses of financial analyses of financial crisescrises

Table 4 – Back to the political economy of financial crises

V.V. Taking into Taking into account some robust account some robust mechanisms linking mechanisms linking finance to economic finance to economic

activityactivity

Figure 6 – US Private Demand Growth and the Credit impulse

1.The procyclicity of credit and economic activity

2. The Yield Curve and Future Economic Activity

Figure 7 – Forecasted probability of recession based on the slope of the yield curve 4 quarters

earlier

3.The related Mechanisms: Impact upon the Shadow Banks Credit Supply via Profitability

Table 3 – A macro financial intermediary VAR, US 1990 Q3 – 2008 Q3

Figure 8 – U.S. stock market and productive investment (% of GDP)

4.The impact of financial wealth upon the real economy

Figure 9 – U.S. Firms debt and stock market valuation (% of GDP)

Figure 10 – U.S.: total debt and financial and real estate wealth of household (% of

real disposable income)

Figure 11 – U.S.: Total subprime credit (billion dollars) and housing prices (100 =

2002.1)

VI.VI. Modeling the Modeling the contemporary contemporary

finance-led regimes finance-led regimes within an within an

institutional macro institutional macro theorytheory

Figure 12 – An institutionally grounded macro modeling: A given configuration of a

capitalist economy

Figure 13 – The Channels of finance to real economy in the era of finance led capitalism

VII. VII. Formalizing the Formalizing the resilience and crisis resilience and crisis

of financial of financial networksnetworks

Source: Gai Prasanna, and Sujit Kapadia (2010), p. 11, 22, 24.

Figure 14 – The financial system as a network of assets

and viabilities

Figure 15 – The non linear impact of connectivity upon the

default of banks

Figure 16 – Capital buffers of banks may counteract the risk of

default

VIII. Two other VIII. Two other strategies strategies

Extending a model of stock Extending a model of stock market bubbles to the banking market bubbles to the banking system and the real economysystem and the real economy

Learning and forgetting the Learning and forgetting the origins of crises at the micro origins of crises at the micro and institutional levels.and institutional levels.

CONCLUSIONCONCLUSIONC1 – The present crisis has revealed the

many structural deficiencies of DSGE models: representative agent hypothesis, full rationality,….

C2 – Nevertheless its main weakness might well be the absence of a fully fledged financial system.

C3 – This has been taking into account by the most recent researches within the DSGE paradigm. Can it succeed?

Table 4 – Recent extensions of GSGE models: at last “Banks matter”

C4 – The neo-Walrasian legacy of these models makes problematic the rescue of the DSGE approach: basic neutrality of money and underlying hypothesis of financial markets efficiency.

C5 – This opens an opportunity for the emergence of old and new alternative paradigms but there are many of them.

C6 – A discriminating criteria should be their respective ability to incorporate the basic mechanisms linking finance to real economy, while reproducing the major stylized facts exhibited by long run history of financial crises.

C7 – A possible dilemma:

The search for a quite general model that could fit with all the previous financial crises, only the value of some parameters

A special model coping with the specificities of the present crisis: the clustering of powerful financial innovations with strong negative externalities upon macroeconomic stability.

Thanks for your Thanks for your attention and patienceattention and patience

Robert BOYERCEPREMAP 140, Rue du Chevaleret 75013 PARIS

(France)+ 33 (0)1 40 77 84 12

robert.boyer@ens.frSite WEB : http://www.jourdan.ens.fr/~boyer/