Editing Macroeconomics (section)

==Development==
{{main|History of macroeconomic thought}}
[[File:John Maynard Keynes.jpg|thumb|right|[[John Maynard Keynes]] is considered the initiator of macroeconomics when he published his work ''[[The General Theory of Employment, Interest, and Money]]'' in 1936.]]

Macroeconomics as a separate field of research and study is generally recognized to start with the publication of [[John Maynard Keynes]]' ''[[The General Theory of Employment, Interest, and Money]]'' in 1936.<ref name=Dimand/><ref>Snowdon and Vane (2005).</ref><ref name=Blanchard/>{{rp|526}} The terms "macrodynamics" and "macroanalysis" were introduced by [[Ragnar Frisch]] in 1933, and Lawrence Klein in 1946 used the word "macroeconomics" itself in a journal title in 1946.<ref name=Dimand/> but naturally several of the themes which are central to macroeconomic research had been discussed by thoughtful economists and other writers long before 1936.<ref name=Dimand/>

===Before Keynes===
In particular, macroeconomic questions before Keynes were the topic of the two long-standing traditions of [[business cycle|business cycle theory]] and [[monetary theory]]. [[William Stanley Jevons]] was one of the pioneers of the first tradition, whereas the [[quantity theory of money]], labelled the oldest surviving theory in economics, as an example of the second was described already in the 16th century by [[Martín de Azpilcueta]] and later discussed by personalities like [[John Locke]] and [[David Hume]]. In the first decades of the 20th century monetary theory was dominated by the eminent economists [[Alfred Marshall]], [[Knut Wicksell]] and [[Irving Fisher]].<ref name=Dimand>Dimand (2008).</ref>

===Keynes and Keynesian economics===

When the Great Depression struck, the reigning economists had difficulty explaining how goods could go unsold and workers could be left unemployed. In the prevailing [[neoclassical economics]] paradigm, prices and wages would drop until the market cleared, and all goods and labor were sold. Keynes in his main work, the ''General Theory'', initiated what is known as the [[Keynesian Revolution]]. He offered a new interpretation of events and a whole intellectural framework - a novel theory of economics that explained why markets might not clear, which would evolve into a school of thought known as [[Keynesian economics]], also called Keynesianism or Keynesian theory.<ref name=Blanchard/>{{rp|526}}

In Keynes' theory, [[aggregate demand]] - by Keynes called "effective demand" - was key to determining output. Even if Keynes conceded that output might eventually return to a medium-run equilibrium (or "potential") level, the process would be slow at best. Keynes coined the term [[liquidity preference]] (his preferred name for what is also known as [[money demand]]) and explained how monetary policy might affect aggregate demand, at the same time offering clear policy recommendations for an active role of fiscal policy in stabilizing aggregate demand and hence output and employment. In addition, he explained how the [[multiplier effect]] would magnify a small decrease in consumption or investment and cause declines throughout the economy, and noted the role that uncertainty and [[Animal spirits (Keynes)|animal spirits]] can play in the economy.<ref name=Blanchard/>{{rp|526}}

The generation following Keynes combined the macroeconomics of the ''General Theory'' with neoclassical microeconomics to create the [[neoclassical synthesis]]. By the 1950s, most economists had accepted the synthesis view of the macroeconomy.<ref name=Blanchard/>{{rp|526}} Economists like [[Paul Samuelson]], [[Franco Modigliani]], [[James Tobin]], and [[Robert Solow]] developed formal Keynesian models and contributed formal theories of consumption, investment, and money demand that fleshed out the Keynesian framework.<ref name=Blanchard/>{{rp|527}}

===Monetarism===
[[Milton Friedman]] updated the quantity theory of money to include a role for money demand. He argued that the role of money in the economy was sufficient to explain the [[Great Depression]], and that aggregate demand oriented explanations were not necessary. Friedman also argued that monetary policy was more effective than fiscal policy; however, Friedman doubted the government's ability to "fine-tune" the economy with monetary policy. He generally favored a policy of steady growth in money supply instead of frequent intervention.<ref name=Blanchard/>{{rp|528}}

Friedman also challenged the original simple [[Phillips curve]] relationship between inflation and unemployment. Friedman and [[Edmund Phelps]] (who was not a monetarist) proposed an "augmented" version of the Phillips curve that excluded the possibility of a stable, long-run tradeoff between inflation and unemployment.<ref>{{Cite web|url=http://www.econlib.org/library/Enc/PhillipsCurve.html|title=Phillips Curve: The Concise Encyclopedia of Economics {{!}} Library of Economics and Liberty|website=www.econlib.org|access-date=2018-01-23}}</ref> When the [[1970s energy crisis|oil shocks]] of the 1970s created a high unemployment and high inflation, Friedman and Phelps were vindicated. Monetarism was particularly influential in the early 1980s, but fell out of favor when central banks found the results disappointing when trying to target money supply instead of interest rates as monetarists recommended, concluding that the relationships between money growth, inflation and real GDP growth are too unstable to be useful in practical monetary policy making.<ref>{{cite journal |last1=Williamson |first1=Stephen D. |title=The Role of Central Banks |journal=Canadian Public Policy |date=2020 |volume=46 |issue=2 |pages=198–213 |doi=10.3138/cpp.2019-058 |jstor=26974728 |s2cid=219465676 |issn=0317-0861|doi-access=free }}</ref>

===New classical economics===
[[New classical macroeconomics]] further challenged the Keynesian school. A central development in new classical thought came when [[Robert Lucas, Jr.|Robert Lucas]] introduced [[rational expectations]] to macroeconomics. Prior to Lucas, economists had generally used [[adaptive expectations]] where agents were assumed to look at the recent past to make expectations about the future. Under rational expectations, agents are assumed to be more sophisticated.<ref name=Blanchard/>{{rp|530}} Consumers will not simply assume a 2% inflation rate just because that has been the average the past few years; they will look at current monetary policy and economic conditions to make an informed forecast. In the new classical models with rational expectations, monetary policy only had a limited impact.

Lucas also made an [[Lucas critique|influential critique]] of Keynesian empirical models. He argued that forecasting models based on empirical relationships would keep producing the same predictions even as the underlying model generating the data changed. He advocated models based on fundamental economic theory (i.e. having an explicit [[Microfoundations|microeconomic foundation]]) that would, in principle, be structurally accurate as economies changed.<ref name=Blanchard/>{{rp|530}}

Following Lucas's critique, new classical economists, led by [[Edward C. Prescott]] and [[Finn E. Kydland]], created [[real business cycle]] (RBC) models of the macro economy. RBC models were created by combining fundamental equations from neo-classical microeconomics to make quantitative models. In order to generate macroeconomic fluctuations, RBC models explained recessions and unemployment with changes in technology instead of changes in the markets for goods or money. Critics of RBC models argue that technological changes, which typically diffuse slowly throughout the economy, could hardly generate the large short-run output fluctuations that we observe. In addition, there is strong empirical evidence that monetary policy does affect real economic activity, and the idea that technological regress can explain recent recessions seems implausible.<ref name=Blanchard/>{{rp|533}}<ref name=Romer/>{{rp|195}}

Despite criticism of the realism in the RBC models, they have been very influential in [[economic methodology]] by providing the first examples of [[general equilibrium]] models based on [[Microfoundations|microeconomic foundations]] and a specification of underlying shocks that aim to explain the main features of macroeconomic fluctuations, not only qualitatively, but also quantitatively. In this way, they were forerunners of the later DSGE models.<ref name=Romer/>{{rp|194}}

===New Keynesian response===
[[New Keynesian]] economists responded to the new classical school by adopting rational expectations and focusing on developing micro-founded models that were immune to the Lucas critique. Like classical models, new classical models had assumed that prices would be able to adjust perfectly and monetary policy would only lead to price changes. New Keynesian models investigated sources of [[Sticky (economics)|sticky prices and wages]] due to [[imperfect competition]],<ref>[http://huwdixon.org/SurfingEconomics/chapter4.pdf The role of imperfect competition in new Keynesian economics], Chapter 4 of [http://huwdixon.org/SurfingEconomics/index.html Surfing Economics] by [[Huw Dixon]]</ref> which would not adjust, allowing monetary policy to impact quantities instead of prices. [[Stanley Fischer]] and [[John B. Taylor]] produced early work in this area by showing that monetary policy could be effective even in models with rational expectations when contracts locked in wages for workers. Other new Keynesian economists, including [[Olivier Blanchard]], [[Janet Yellen]], [[Julio Rotemberg]], [[Greg Mankiw]], [[David Romer]], and [[Michael Woodford (economist)|Michael Woodford]], expanded on this work and demonstrated other cases where various market imperfections caused inflexible prices and wages leading in turn to monetary and fiscal policy having real effects. Other researchers focused on imperferctions in labor markets, developing models of [[efficiency wage]]s or [[Search and matching theory (economics)|search and matching]] (SAM) models, or imperfections in credit markets like [[Ben Bernanke]].<ref name=Blanchard/>{{rp|532–36}}

By the late 1990s, economists had reached a rough consensus.<ref>Blanchard (2009)</ref> The market imperfections and nominal rigidities of new Keynesian theory was combined with rational expectations and the RBC methodology to produce a new and popular type of models called [[dynamic stochastic general equilibrium]] (DSGE) models. The fusion of elements from different schools of thought has been dubbed the [[new neoclassical synthesis]].<ref>{{cite journal |last1=Goodfriend |first1=Marvin |last2=King |first2=Robert G. |title=The New Neoclassical Synthesis and the Role of Monetary Policy |journal=NBER Macroeconomics Annual |date=1997 |volume=12 |pages=231–283 |doi=10.2307/3585232 |jstor=3585232 |url=https://www.jstor.org/stable/3585232 |access-date=8 September 2023}}</ref><ref>{{cite journal |last1=Woodford |first1=Michael |title=Convergence in Macroeconomics: Elements of the New Synthesis |journal=American Economic Journal: Macroeconomics |date=January 2009 |volume=1 |issue=1 |pages=267–279 |doi=10.1257/mac.1.1.267 |url=https://www.aeaweb.org/articles?id=10.1257/mac.1.1.267 |access-date=8 September 2023 |language=en |issn=1945-7707}}</ref> These models are now used by many central banks and are a core part of contemporary macroeconomics.<ref name=Blanchard/>{{rp|535–36}}

===2008 financial crisis===
The [[2008 financial crisis]], which led to the [[Great Recession]], led to major reassessment of macroeconomics, which as a field generally had neglected the potential role of [[financial institution]]s in the economy. After the crisis, macroeconomic researchers have turned their attention in several new directions:

* the financial system and the nature of macrofinancial linkages and frictions, studying leverage, liquidity and complexity problems in the financial sector, the use of [[Macroprudential regulation|macroprudential tools]] and the dangers of an [[Fiscal sustainability|unsustainable]] public debt<ref name=Blanchard/>{{rp|537}}<ref>{{cite journal |last1=Glandon |first1=P. J. |last2=Kuttner |first2=Ken |last3=Mazumder |first3=Sandeep |last4=Stroup |first4=Caleb |title=Macroeconomic Research, Present and Past |journal=Journal of Economic Literature |date=September 2023 |volume=61 |issue=3 |pages=1088–1126 |doi=10.1257/jel.20211609 |url=https://www.aeaweb.org/articles?id=10.1257/jel.20211609 |access-date=8 September 2023 |language=en |issn=0022-0515}}</ref>
* increased emphasis on [[Applied economics|empirical work]] as part of the so-called [[credibility revolution]] in economics, using improved methods to distinguish between [[Correlation does not imply causation|correlation and causality]] to improve future policy discussions<ref name=":0">Nakamura and Steinsson (2018) write that macroeconomics struggles with long-term predictions, which is a result of the high complexity of the systems it studies.</ref>
* interest in understanding the importance of [[Heterogeneity in economics|heterogeneity]] among the economic agents, leading among other examples to the construction of heterogeneous agent new Keynesian models ([[HANK model]]s), which may potentially also improve understanding of the impact of macroeconomics on the [[income distribution]]<ref>{{cite web |last1=Guvenen |first1=Fatih |title=Macroeconomics with Heterogeneity: A Practical Guide |url=https://www.nber.org/system/files/working_papers/w17622/w17622.pdf |website=www.nber.org |publisher=National Bureau of Economic Research |access-date=8 September 2023}}</ref>
* understanding the implications of integrating the findings of the increasingly useful [[behavioral economics]] literature into macroeconomics<ref>{{cite web |last1=Ji |first1=Yuemei |last2=De Grauwe |first2=Paul |title=Behavioural economics is also useful in macroeconomics |url=https://cepr.org/voxeu/columns/behavioural-economics-also-useful-macroeconomics |website=CEPR |publisher=Centre for Economic Policy Research |access-date=8 September 2023 |language=en |date=1 November 2017}}</ref> and behavioral finance

=== Growth models ===
Research in the economics of the determinants behind long-run [[economic growth]] has followed its own course.<ref>{{cite book |last1=Howitt |first1=Peter |last2=Weil |first2=David N. |chapter=Economic Growth |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_2314-1 |title=The New Palgrave Dictionary of Economics |publisher=Palgrave Macmillan UK |pages=1–11 |language=en |doi=10.1057/978-1-349-95121-5_2314-1 |date=2016|isbn=978-1-349-95121-5 }}</ref> The [[Harrod-Domar]] model from the 1940s attempted to build a long-run growth model inspired by Keynesian demand-driven considerations.<ref>{{cite book |last1=Eltis |first1=Walter |chapter=Harrod–Domar Growth Model |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_1267-1 |title=The New Palgrave Dictionary of Economics |publisher=Palgrave Macmillan UK |pages=1–5 |language=en |doi=10.1057/978-1-349-95121-5_1267-1 |date=2016|isbn=978-1-349-95121-5 }}</ref> The [[Solow–Swan model]] worked out by [[Robert Solow]] and, independently, [[Trevor Swan]] in the 1950s achieved more long-lasting success, however, and is still today a common textbook model for explaining economic growth in the long-run.<ref>{{Cite web|last=Banton|first=Caroline|title=The Neoclassical Growth Theory Explained|url=https://www.investopedia.com/terms/n/neoclassical-growth-theory.asp|access-date=2020-09-21|website=Investopedia|language=en}}</ref> The model operates with a [[production function]] where national output is the product of two inputs: capital and labor. The Solow model assumes that labor and capital are used at constant rates without the fluctuations in unemployment and capital utilization commonly seen in business cycles.{{sfn|Solow|2002|pp=518–19}} In this model, increases in output, i.e. economic growth, can only occur because of an increase in the capital stock, a larger population, or technological advancements that lead to higher productivity ([[total factor productivity]]). An increase in the savings rate leads to a temporary increase as the economy creates more capital, which adds to output. However, eventually the depreciation rate will limit the expansion of capital: savings will be used up replacing depreciated capital, and no savings will remain to pay for an additional expansion in capital. Solow's model suggests that economic growth in terms of output per capita depends solely on technological advances that enhance productivity.{{sfn|Solow|2002|p=519}} The Solow model can be interpreted as a special case of the more general [[Ramsey–Cass–Koopmans model|Ramsey growth model]], where households' savings rates are not constant as in the Solow model, but derived from an explicit intertemporal [[utility function]].

In the 1980s and 1990s [[endogenous growth theory]] arose to challenge the neoclassical growth theory of Ramsey and Solow. This group of models explains economic growth through factors such as increasing returns to scale for capital and [[Learning-by-doing (economics)|learning-by-doing]] that are endogenously determined instead of the exogenous technological improvement used to explain growth in Solow's model.{{sfn|Blaug|2002|pp=202–03}} Another type of endogenous growth models endogenized the process of technological progress by modelling [[research and development]] activities by profit-maximizing firms explicitly within the growth models themselves.<ref name=Sørensen/>{{rp|280–308}}

==== Environmental and climate issues ====
[[File:Diagram of natural resource flows-en.svg|thumb|Natural resources flow through the economy and end up as waste and pollution.]]

Since the 1970s, various environmental problems have been integrated into growth and other macroeconomic models to study their implications more thoroughly. During the oil crises of the 1970s when scarcity problems of natural resources were high on the public agenda, economists like [[Joseph Stiglitz]] and [[Robert Solow]] introduced [[non-renewable resource]]s into neoclassical growth models to study the possibilities of maintaining growth in living standards under these conditions.<ref name=Sørensen/>{{rp|201–39}} More recently, the issue of [[climate change]] and the possibilities of a [[sustainable development]] are examined in so-called [[Integrated assessment modelling|integrated assessment models]], pioneered by [[William Nordhaus]].<ref>{{cite book |last1=Hassler |first1=J. |last2=Krusell |first2=P. |last3=Smith |first3=A. A. |chapter=Chapter 24 - Environmental Macroeconomics |chapter-url=https://www.sciencedirect.com/science/article/abs/pii/S1574004816300076 |title=Handbook of Macroeconomics |publisher=Elsevier |access-date=9 September 2023 |pages=1893–2008 |date=1 January 2016|volume=2 |doi=10.1016/bs.hesmac.2016.04.007 |isbn=9780444594877 }}</ref> In macroeconomic models in [[environmental economics]], the economic system is dependant upon the environment. In this case, the [[circular flow of income]] diagram may be replaced by a more complex flow diagram reflecting the input of solar energy, which sustains natural inputs and [[ecosystem services|environmental services]] which are then used as units of [[Production (economics)|production]]. Once consumed, natural inputs pass out of the economy as pollution and waste. The potential of an environment to provide services and materials is referred to as an "environment's source function", and this function is depleted as resources are consumed or pollution contaminates the resources. The "sink function" describes an environment's ability to absorb and render harmless waste and pollution: when waste output exceeds the limit of the sink function, long-term damage occurs.<ref name=Harris2006>Harris J. (2006). ''Environmental and Natural Resource Economics: A Contemporary Approach''. Houghton Mifflin Company.</ref>{{rp|8}}  In 2024 a new approach was proposed which would institutionalize Inclusion, Sustainability and Resilience in Domestic Economic Governance.<ref>{{cite book |last= Samans|first= Richard |date=2024 |title= Human-Centred Economics: The Living Standards of Nations (open access) |url=https://richardsamans.net/book-human-centred-economics/ |location= |publisher= Palgrave Macmillan in association with the ILO|access-date=22 April 2025}}</ref>