<p>One of the biggest areas of policy research that seems to have gotten a lot of attention since the Great Recession is <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2012.00729.x/full" rel="nofollow noreferrer">macroprudential policy</a>. My understanding of it is that it tries to move beyond microfoundations of understanding individual risk and looks at system wide risk across institutions. The article I link gives a lot of good resources on recent research done on it in the last 10 years, and some limited comments on the effectiveness of new policies formed out of it.</p>

CC BY-SA 3.0
2017-11-15T13:01:22.293Z
2017-11-15T13:01:22.293Z
Kitsune Cavalry
<p>I'll sketch a few initial thoughts.</p>

<p>Since the crisis, several financial economics research agendas have examined topics related to the questions of what caused the great recession and why was it so big?</p>

<ul>
<li><p><strong>Household finance (and relation to the real economy)</strong></p>

<p>While corporate finance has traditionally examined the financing decisions of firms, there has been increasing study of the financial decisions of households. The work of Sufi and Mian stands out in examining how credit supply shocks (through the advent of mortgage securitization) impacted consumption.</p>

<p>More people in financial economics are looking at mortgage debt, student debt, credit card debt, etc.... Are households financially constrained? How do households make their financing decisions?</p></li>
<li><p><strong>The financial system's role in the crisis?</strong></p>

<p>Early on in the subprime crisis, a view developed that it would be a limited problem because there simply wasn't that much subprime mortgage debt. The .com bust erased more wealth than subprime debt existed, and we survived the .com bust.</p>

<p>What was different this time?</p>

<ul>
<li>Reinvigorated study of banking: bank runs, fire sales, etc...</li>
<li>Macro-finance theories with a financial sector and limited capital (negative shocks deplete financial system's capital -> higher risk prices etc...)</li>
<li>Increased study of market micros-structure (perhaps engineering details, the actual pipes and plumbing of the financial system actually are of interest to economists?)</li>
<li>Increased study of liquidity, risk prices for liquidity</li>
</ul></li>
</ul>

CC BY-SA 3.0
2017-11-15T15:19:32.707Z
2017-11-15T16:01:03.417Z
2017-11-15T16:01:03.417Z
Matthew Gunn
<p>Well, in macroeconomics, namely in DSGE modelling, VOXEU has recently published a <a href="http://voxeu.org/content/dsge-models-conduct-policy-use-intended" rel="nofollow noreferrer">report on its uses by Central Banks (CBs)</a>, and future lines of improvement, which academics have been tackling but still hasn't found its way into CBs policy analysis. There's no space to explain all the new topics, nor do I think it's the intention of this question. So, I'll just enunciate the topics, with some references. More can be found in reading the report. Also, I'll focus on the theoretical considerations, i.e., it's known that, empirically, the the VAR obtained by solving the DSGE model can be considered as misspecified (<a href="http://www.econ.vt.edu/wp-content/uploads/2016/09/Spanos13-DSGE-model-validation-2016.pdf" rel="nofollow noreferrer">see here</a>). This is a WP, but you can easily find many articles on this subject, increasingly so since the crisis)</p>

<ul>
<li>Financial Frictions (<a href="https://www.aeaweb.org/articles?id=10.1257/aer.104.1.27" rel="nofollow noreferrer">an example</a>)</li>
<li>Forward Guidance(extending low-rates period), due to the presence of a ZLB (<a href="https://www.brookings.edu/bpea-articles/the-zero-bound-on-interest-rates-and-optimal-monetary-policy/" rel="nofollow noreferrer">see here</a>; this was already being studied before the crisis.)</li>
<li>(Incomplete Markets) Heterogeneity across households in
the transmission of monetary and fiscal policy (<a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1899.en.pdf" rel="nofollow noreferrer">see here</a>). I would also add firm heterogeneity (<a href="https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Discussion_Paper_1/2017/2017_08_31_dkp_25.pdf?__blob=publicationFile" rel="nofollow noreferrer">example here</a>)</li>
<li>Systemic fragilities, i.e., economy more prone to crisis due to increasing leverage (<a href="http://www.econ.nyu.edu/user/gertlerm/GertlerKiyotakiAERJuly2015.pdf" rel="nofollow noreferrer">an example</a>)</li>
<li>Allowing for structural (long-run) changes, instead of a simple sequence of short-run shocks, this allows for fluctuations of for example the natural rate of interest (<a href="http://www.frbsf.org/economic-research/files/wp2016-11.pdf" rel="nofollow noreferrer">see here</a> and <a href="https://www.google.pt/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=1&amp;ved=0ahUKEwjt947V16_XAhUMthQKHbuqA3UQFggmMAA&amp;url=https%3A%2F%2Fwww.aeaweb.org%2Fconference%2F2017%2Fpreliminary%2Fpaper%2Fk3Qr4Qz2&amp;usg=AOvVaw1Pu9VhqKiL-W03g27elqq4" rel="nofollow noreferrer">here</a>). </li>
</ul>

<p>Finally, one critique, with which I agree, and Romer has written very funny and interesting '<a href="https://paulromer.net/wp-content/uploads/2016/09/WP-Trouble.pdf" rel="nofollow noreferrer">WP</a>' on, is the degree of exogeneity, through shocks, that is needed to explain the economy.</p>

<p>Behavioural economics (2017 Nobel prize winner was from this area) may supply us with an answer. It allows to endogenize some of the shocks. Here's an <a href="http://voxeu.org/article/behavioural-economics-also-useful-macroeconomics" rel="nofollow noreferrer">article on VOXEU</a> with many references, and analysis of an example of how it's done. </p>

<p>Edit: To complement Kitsune answer, I find this image from the wikipedia page really good. In a very succint way, it explains the difference between macro and micro prudential perspectives.</p>

<p><a href="https://i.sstatic.net/jWe1O.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/jWe1O.png" alt="enter image description here"></a></p>

CC BY-SA 3.0
2017-11-08T18:55:09.663Z
2017-11-15T13:06:40.813Z
2017-11-15T13:06:40.813Z
An old man in the sea.
<p>In the aftermath of 2008 economists were, fairly or not, blamed for a failure to foresee the coming crisis. Ideas such as "<a href="https://en.wikipedia.org/wiki/Great_Moderation" rel="noreferrer">The Great Moderation</a>" and market efficiency were openly ridiculed as hubristic. </p>

<p>Now, almost a decade later, seems like a good time to take stock and ask: What have been the main developments in macroeconomics and financial economics research that have emerged in response to the financial crisis?</p>

<ul>
<li>are there lines of research that have been discredited or essentially abandoned?</li>
<li>are there new topics that have received much more attention?</li>
<li>are the new approaches to modelling (or approaches that have come to be used more than previously)?</li>
<li>have any big new ideas emerged in our understanding of recessions / financial crises?</li>
</ul>

<p>Or perhaps there is good reason to think that everything was fine before and so nothing has to change.</p>

CC BY-SA 3.0
2017-11-05T13:55:12.007Z
Not necessarily answering your question, but the Economist recently mentioned [a new, after-crisis approach of teaching economics](https://www.economist.com/news/finance-and-economics/21729443-students-are-forced-grapple-real-world-very-beginning-their), through the [CORE project](http://www.core-econ.org/).
JoaoBotelho
CC BY-SA 3.0
2017-11-12T18:57:22.540Z
Related: ftp://ftp.repec.org/opt/ReDIF/RePEc/ibf/gjbres/gjbr-v7n3-2013/GJBR-V7N3-2012-8.pdf
EconJohn
CC BY-SA 3.0
2017-11-15T18:19:15.847Z
Here's another related paper: "On DSGE Models" by Christiano,  Eichenbaum, and Trabandt. From the abstract, "This paper reviews the state of DSGE models before the financial crisis and how DSGE modelers have responded to the crisis and its aftermath. In addition, we discuss the role of DSGE models in the policy process." http://faculty.wcas.northwestern.edu/~lchrist/research/JEP_2017/DSGE_final.pdf
jmbejara
CC BY-SA 3.0
2017-11-16T18:06:09.910Z
@jmbejara I've just skimmed through that paper, and I must say I really disliked the tone, and even more their position w.r.t. DSGE. It was almost that they couldn't even conceive that DSGE modelling needed a serious evolution, if not a revolution. Maybe because they have a highly invested interest in not considering all of their previous research in need of a dire reconsideration...
An old man in the sea.
CC BY-SA 3.0
2017-11-16T18:17:22.123Z
@Anoldmaninthesea. I agree to some degree, esp. wrt the tone. I posted it as I figured it's relevant and it's making the rounds right now---but I don't necessarily endorse it. However, I think the paper presents some useful points information (describes how the financial crisis is changing the focus of DSGE research among this group).
jmbejara
<reference-request><history-economic-thought>
What have been the main developments in macroeconomics and financial economics since the 2008 financial crisis?
Ubiquitous
# What have been the main developments in macroeconomics and financial economics since the 2008 financial crisis?

(Asked by: username_0 on 2017-11-05)

In the aftermath of 2008 economists were, fairly or not, blamed for a failure to foresee the coming crisis. Ideas such as "[The Great Moderation](https://en.wikipedia.org/wiki/Great_Moderation)" and market efficiency were openly ridiculed as hubristic.

Now, almost a decade later, seems like a good time to take stock and ask: What have been the main developments in macroeconomics and financial economics research that have emerged in response to the financial crisis?

* are there lines of research that have been discredited or essentially abandoned?
* are there new topics that have received much more attention?
* are the new approaches to modelling (or approaches that have come to be used more than previously)?
* have any big new ideas emerged in our understanding of recessions / financial crises?

Or perhaps there is good reason to think that everything was fine before and so nothing has to change.

**Tags:** reference-request, history-economic-thought

> **Comments:**
> **username_1**: Not necessarily answering your question, but the Economist recently mentioned [a new, after-crisis approach of teaching economics](https://www.economist.com/news/finance-and-economics/21729443-students-are-forced-grapple-real-world-very-beginning-their), through the [CORE project](http://www.core-econ.org/).  
> **username_2**: Related: ftp://ftp.repec.org/opt/ReDIF/RePEc/ibf/gjbres/gjbr-v7n3-2013/GJBR-V7N3-2012-8.pdf  
> **username_3**: Here's another related paper: "On DSGE Models" by Christiano,  Eichenbaum, and Trabandt. From the abstract, "This paper reviews the state of DSGE models before the financial crisis and how DSGE modelers have responded to the crisis and its aftermath. In addition, we discuss the role of DSGE models in the policy process." http://faculty.wcas.northwestern.edu/~lchrist/research/JEP_2017/DSGE_final.pdf  
> **username_4**: @username_3 I've just skimmed through that paper, and I must say I really disliked the tone, and even more their position w.r.t. DSGE. It was almost that they couldn't even conceive that DSGE modelling needed a serious evolution, if not a revolution. Maybe because they have a highly invested interest in not considering all of their previous research in need of a dire reconsideration...  
> **username_3**: @Anoldmaninthesea. I agree to some degree, esp. wrt the tone. I posted it as I figured it's relevant and it's making the rounds right now---but I don't necessarily endorse it. However, I think the paper presents some useful points information (describes how the financial crisis is changing the focus of DSGE research among this group).  

---

## 3 answers

### Answer by username_4 on 2017-11-08. Score: 5 | Accepted answer

Well, in macroeconomics, namely in DSGE modelling, VOXEU has recently published a [report on its uses by Central Banks (CBs)](http://voxeu.org/content/dsge-models-conduct-policy-use-intended), and future lines of improvement, which academics have been tackling but still hasn't found its way into CBs policy analysis. There's no space to explain all the new topics, nor do I think it's the intention of this question. So, I'll just enunciate the topics, with some references. More can be found in reading the report. Also, I'll focus on the theoretical considerations, i.e., it's known that, empirically, the the VAR obtained by solving the DSGE model can be considered as misspecified ([see here](http://www.econ.vt.edu/wp-content/uploads/2016/09/Spanos13-DSGE-model-validation-2016.pdf)). This is a WP, but you can easily find many articles on this subject, increasingly so since the crisis)

* Financial Frictions ([an example](https://www.aeaweb.org/articles?id=10.1257/aer.104.1.27))
* Forward Guidance(extending low-rates period), due to the presence of a ZLB ([see here](https://www.brookings.edu/bpea-articles/the-zero-bound-on-interest-rates-and-optimal-monetary-policy/); this was already being studied before the crisis.)
* (Incomplete Markets) Heterogeneity across households in
  the transmission of monetary and fiscal policy ([see here](https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1899.en.pdf)). I would also add firm heterogeneity ([example here](https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Discussion_Paper_1/2017/2017_08_31_dkp_25.pdf?__blob=publicationFile))
* Systemic fragilities, i.e., economy more prone to crisis due to increasing leverage ([an example](http://www.econ.nyu.edu/user/gertlerm/GertlerKiyotakiAERJuly2015.pdf))
* Allowing for structural (long-run) changes, instead of a simple sequence of short-run shocks, this allows for fluctuations of for example the natural rate of interest ([see here](http://www.frbsf.org/economic-research/files/wp2016-11.pdf) and [here](https://www.google.pt/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwjt947V16_XAhUMthQKHbuqA3UQFggmMAA&url=https%3A%2F%2Fwww.aeaweb.org%2Fconference%2F2017%2Fpreliminary%2Fpaper%2Fk3Qr4Qz2&usg=AOvVaw1Pu9VhqKiL-W03g27elqq4)).

Finally, one critique, with which I agree, and Romer has written very funny and interesting '[WP](https://paulromer.net/wp-content/uploads/2016/09/WP-Trouble.pdf)' on, is the degree of exogeneity, through shocks, that is needed to explain the economy.

Behavioural economics (2017 Nobel prize winner was from this area) may supply us with an answer. It allows to endogenize some of the shocks. Here's an [article on VOXEU](http://voxeu.org/article/behavioural-economics-also-useful-macroeconomics) with many references, and analysis of an example of how it's done.

Edit: To complement username_5 answer, I find this image from the wikipedia page really good. In a very succint way, it explains the difference between macro and micro prudential perspectives.

[![enter image description here](https://i.sstatic.net/jWe1O.png)](https://i.sstatic.net/jWe1O.png)


---

### Answer by username_5 on 2017-11-15. Score: 2

One of the biggest areas of policy research that seems to have gotten a lot of attention since the Great Recession is [macroprudential policy](http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2012.00729.x/full). My understanding of it is that it tries to move beyond microfoundations of understanding individual risk and looks at system wide risk across institutions. The article I link gives a lot of good resources on recent research done on it in the last 10 years, and some limited comments on the effectiveness of new policies formed out of it.


---

### Answer by username_6 on 2017-11-15. Score: 2

I'll sketch a few initial thoughts.

Since the crisis, several financial economics research agendas have examined topics related to the questions of what caused the great recession and why was it so big?

* **Household finance (and relation to the real economy)**

  While corporate finance has traditionally examined the financing decisions of firms, there has been increasing study of the financial decisions of households. The work of Sufi and Mian stands out in examining how credit supply shocks (through the advent of mortgage securitization) impacted consumption.

  More people in financial economics are looking at mortgage debt, student debt, credit card debt, etc.... Are households financially constrained? How do households make their financing decisions?
* **The financial system's role in the crisis?**

  Early on in the subprime crisis, a view developed that it would be a limited problem because there simply wasn't that much subprime mortgage debt. The .com bust erased more wealth than subprime debt existed, and we survived the .com bust.

  What was different this time?

  + Reinvigorated study of banking: bank runs, fire sales, etc...
  + Macro-finance theories with a financial sector and limited capital (negative shocks deplete financial system's capital -> higher risk prices etc...)
  + Increased study of market micros-structure (perhaps engineering details, the actual pipes and plumbing of the financial system actually are of interest to economists?)
  + Increased study of liquidity, risk prices for liquidity


---

