Friday, December 4, 2009

Macroeconomic Theory Did Not Fail, Sumner

Scott Sumner (The Money Illusion) claims that an (almost) standard “aggregate demand-aggregate supply” (AD-AS) model, just modified by Alex Tabarrok and Tyler Cowen in their new textbook in order to substitute the inflation rate for price levels, goes a long way in explaining the current great recession.

According to him the Federal Reserve did cause the contraction by its ultra-restrictive monetary policy in 2008. He however does not exclude that some real supply side difficulties also contributed to the crisis, but that too can be inserted into the AD-AS diagram.

Read the paper here .

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