03: Economic theory and economic policy in crisis?

For the most part, economists did not foresee or propose measures that would have lessened the damage from the 2008-09 financial crisis. The seminar intends to review this failure, consider explanations of the causes of the crisis, ways to improve economic analysis, and to avoid future crises.

Most observers fault one or a combination of regulatory failures, global imbalances, or excessively loose monetary policies for the crash: which of these stands up to scrutiny? Why did economists not anticipate the effects of these shortcomings? Was this simply a case of economists being blindsided by a “This time is different” mentality in the face of asset price bubbles or was there too much emphasis on a micro approach focusing on the behaviour of one representative household to understand global financial markets and economic development?

How should the underlying approach to economic analysis change in light of the experi-ence during the crisis? One approach, proposed by Akerlof and others, is to drop some assumptions of rationality implicit in the behaviour of the famous homo oeconomicus and to replace the rationality paradigm by a descriptive behavioural paradigm based on interdisciplinary research. Another option, proposed by Keynesian economists, is to re-turn to an analysis based on macroeconomic logic instead of one based on micro-logic without dropping the rationality assumption to the full.

Many policy and institutional challenges lie ahead. What does the crisis tell us about the main challenges to regulatory changes-are they more to address primitive herding, in-centives for excessive risk-taking, or excessively sophisticated financial instruments and practices? While the crisis originated in high-income countries, it ultimately had a global reach: should policy changes be driven primarily by national agendas and preferences or should global institutions and coordination play a larger role?

The main topics of the seminar are:

– The search for the root causes of the financial crisis
– The lessons to be drawn by economists of different schools of thought
– The lessons to be drawn by economic policy makers at the national level, including the analysis of different policy challenges in high income, emerg-ing market and low income countries
– The lessons to be drawn for global governance