'Has the Rethinking of Macroeconomic Policy Been Successful?'

The beginning of a long discussion from Gavyn Davies:

Has the rethinking of macroeconomic policy been successful?: The great financial crash of 2008 was expected to lead to a fundamental re-thinking of macro-economics, perhaps leading to a profound shift in the mainstream approach to fiscal, monetary and international policy. That is what happened after the 1929 crash and the Great Depression, though it was not until 1936 that the outline of the new orthodoxy appeared in the shape of Keynes’ General Theory. It was another decade or more before a simplified version of Keynes was routinely taught in American university economics classes. The wheels of intellectual change, though profound in retrospect, can grind fairly slowly.

Seven years after 2008 crash, there is relatively little sign of a major transformation in the mainstream macro-economic theory that is used, for example, by most central banks. The “DSGE” (mainly New Keynesian) framework remains the basic workhorse, even though it singularly failed to predict the crash. Economists have been busy adding a more realistic financial sector to the structure of the model [1], but labour and product markets, the heart of the productive economy, remain largely untouched.

What about macro-economic policy? Here major changes have already been implemented, notably in banking regulation, macro-prudential policy and most importantly the use of the central bank balance sheet as an independent instrument of monetary policy. In these areas, policy-makers have acted well in advance of macro-economic researchers, who have been struggling to catch up. ...

There has been more progress on the theoretical front than I expected, particularly in adding financial sector frictions to the NK-DSGE framework and in overcoming the restrictions imposed by the representative agent model. At the same time, there has been less progress than I expected in developing alternatives to the standard models. As far as I can tell, a serious challenge to the standard model has not yet appeared. My biggest disappointment is how much resistance there has been to the idea that we need to even try to find alternative modeling structures that might do better than those in use now, and the arrogance that asserts that we have little to learn about theory or policy from the economists who wrote during and after the Great Depression.