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February 03, 2021 Wednesday 09:52:55 AM IST

New Macroeconomic Model

Teacher Insights

Existing Macroeconomics has become unsuited to understanding large economic shocks, according to economists at the University of Oxford. It was assumed under the New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model that all disturbances are temporary and the economy will eventually return to one stable equilibrium. It doesn’t enable the study of large crises and transitions which see unemployment multiply and financial systems in crisis. It assumes people are well-informed, rational, and dedicate their attention and effort towards one goal. The newly emerging macroeconomic paradigm is MEADE- Multiple Equilibrium and DiversE. It studies how multiple economic equilibria can arise and uses a wide range of different kinds of models to understand what policymakers can do. According to Prof David Vines of Oxford, economists must build up a full understanding of how economies function using a wide range of empirically-grounded tools and models and not on theoretical assumptions.