40_Quick_Refresher - J ournal of Economic Literature Vol...

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Journal of Economic Literature Vol. XXVIII (December 1990), pp. 1645-1 660 A Quick Refresher Course Macroeconomics BY N. GREGORY MANKIW Harvard University and NBER This paper, though new, draws heavily on my previous paper, "Recent Developments in Macroeconomics: A Very Quick Refresher Course," Journal of Money, Credit, and Banking, August 1988, Part 2. I am grateful to Moses Abramovitz, David Laidler, and Thomas Mayer for comments, and to the National Science Foundation for jinancial support. Introduction WENTY YEARS AGO, it was easier being a student of macroeconomics. Mac- roeconomists felt more sure of the an- swers they gave to questions such as, "What causes output and employment to fluctuate?" and "How should policy re- spond to these fluctuations?" At the textbook level, the accepted model of the economy was the IS-LM model. It was little changed from John Hicks' (1937) interpretation of John May- nard Keynes' (1936) once revolutionary vision of the economy. Because the IS- LM model took the price level as given, a Phillips curve of some sort was ap- pended to explain the adjustment of prices. Some thought the Phillips curve had the natural rate property, implying that the economy was self-correcting in the long run. At the more applied level, this consen- sus was embodied in the large-scale macroeconometric models, such as the MIT-Penn-Social Science Research Council (MPS) model. The job of refining these models generated many disserta- tions. Private and public decision makers confidently used the models to forecast important economic time series and to evaluate the effects of alternative macro- economic policies. Today, macroeconomists are much less sure of their answers. The IS-LM model rarely finds its way into scholarly jour- nals; some economists view the model as a relic of a bygone age and no longer bother to teach it. The large-scale mac- roeconometric models are mentioned only occasionally at academic confer- ences, often with derision. A graduate student today is unlikely to devote his dissertation to improving some small sec- tor of the MPS model. In contrast to this radical change in the way academic macroeconomists view their field of study, applied macroecd- nomists have not substantially changed the way they analyze the economy. The IS-LM model, augmented by the Phillips curve, continues to provide the best way 1645
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1646 Journal of Economic Literature, Vol. XXVZZZ (December 1990) to interpret discussions of economic pol- icy in the press and among policy makers. Economists in business and government continue to use the large-scale macro- econometric models for forecasting and policy analysis. The theoretical develop- ments of the past twenty years have had relatively little impact on applied macroeconomics. Why is there such a great disparity be- tween academic and applied macroeco- nomics? The view of some academics is that practitioners have simply fallen be- hind the state of the art, that they con- tinue to use obsolete models because they have not kept up with the quickly advancing field. Yet this self-serving view
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40_Quick_Refresher - J ournal of Economic Literature Vol...

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