The current financial crisis has injured the reputation of macroeconomics, mainly for its inability to predict the imminent financial and economic crisis. To be honest, this incapability to predict does not disquiet me much. It is approximately tautological that severe catastrophes are essentially unpredictable, for or else they would not cause such a high degree of pain. What does distress me about my regulation is that its current core—by which I essentially mean the ostensible dynamic stochastic general equilibrium loom—has become so mesmerized with its own internal sense that it has begun to perplex the precision it has achieved about its own world with the accuracy that it has about the real one. This is risky for both methodological and policy causes.
To be fair to our field, a huge amount of work at the crossroads of macroeconomics and corporate finance has been chasing loads of of the issues that played a central role during the current disaster, including liquidity evaporation, security shortages, bubbles, panics, fire sales, crises, risk-shifting, contagion, and the similar to. On the other hand, much of this literature belongs to the margin of macroeconomics rather than to its core. I will talk about the distinction among the core and the periphery of macroeconomics in addition to the futile nature of the integrator movement—that is, the procedure of gradually bringing the insights of the edge into the dynamic stochastic general equilibrium structure. I dispute that the complexity of macroeconomic communications limits the knowledge we can ever attain, and that we require placing this fact at the center of our investigation. We should regard as what this complexity does to the actions and responses of the economic agent, and seek logical tools and macroeconomic policies that are robust to the huge uncertainty to which we are confined.