Before the 2008 global financial crisis, macroeconomists believed there was nothing more to be discovered in their discipline and that sophisticated macroeconomic models were the perfect tool to predict the future. Recent developments in the global economy have shown that the forecasting crystal ball useful in post-crisis times has yet to be discovered.
The author observes that some economists today are using a different approach to forecasting and predicting the future. Mainstream analysts use financial models, but a small number of rebels challenge this consensus.
How Is This Research Useful to Practitioners?
Chronic instability and uncertainty are a challenge for macroeconomics today. The present tools available (i.e., mathematical models) cannot adequately deal with the status quo. Even sophisticated, dynamic models that are designed to cope with such unforeseeable disturbances as a technology shock do a poor job predicting a major financial crisis.
The author points out a number of drawbacks to modern models, including the assumption of a single macroeconomic equilibrium—the notion that the economy reverts to its previous path after a shock. The world after the 2008 global financial crisis is definitely new, with negative interest rates in many countries, which can become a technical minefield in models.
New macroeconomic tools have yet to be built, but when they are, they will need to incorporate the notion of nonlinearity and even chaos. The author believes that the solution may come from a challenge to the consensus—and not necessarily from the discipline of macroeconomics or from a top research organization or university.
Macroeconomic consensus may become a self-fulfilling prophecy; most people in the industry believe in consensus, and the consensus becomes reality. But consensus leaves the general market vulnerable to such shocks as the 2008 financial crisis, which are unpredictable by any model.
A new tool is required to help macroeconomic analysts embrace the uncertainty because mainstream economists are unlikely to switch from their sophisticated financial models to setting their policies on a hunch.