Explaining the crises (not all, but many of them) as being liquidity traps is not only a misinterpretation but it also leads to false solutions. Just look at the case of Japan after two decades of “policy experiments”. (New) Keynesians like Krugman have reduced its stagnation problem to a liquidity trap and prescribed a wrong therapy which in the end failed to lead to real economic growth. But probably the case of Japan deserves a separate discussion.
The last global recession raised concerns about the ability of macroeconomists to predict crises of such magnitude. Certainly, the forecasting is not the main focus of macroeconomics. I would say that, at least nowadays, it is of rather marginal interest to academic macroeconomists. A proof in this sense is provided by the very low number of publications related to macroeconomic forecasting.
The economic science came under fire during the last financial and economic crisis for many reasons. One thing that came frequently under attention was the supposedly inability of economists to predict the crisis. Well, it seems that the crisis was predicted to a certain extent by some economists, at least that’s what the paper by Bezemer shows.
I discussed in a previous post about the shortcomings of the Big Mac Index and how these issues might lead to misuses of this index. As one would expect, there is a thin academic literature which discusses or uses the Big Mac Index, however the studies that exist make some interesting points which deserve to be mentioned.
Some of the most prominent economists believe that inflation is a solution to the economic woes of US and Euro Area, and I particularly mean Krugman and DeLong. But is it so?
The sovereign debt crisis, see also my blog post on the sovereign debt crisis that focused on deficit spending, has made more evident than ever that the Euro Area is deficient in many respects and one could reasonable state that it is far from an optimal currency area.
Following the effects of the last financial crisis, as the nominal interest rate hit the zero lower bound, the central banks in United States, Euro Area and United Kingdom (to be more precise, it was the Bank of Japan that experienced this approach first) have started to implement a rather extreme form of unconventional monetary policy which became known as the Quantitative Easing.
There is a general agreement that the mainstream macroeconomics has largely failed to predict or correctly estimate the last economic and financial crisis, see the introduction here on the website of the Institute for New Economic Thinking. This failure has motivated more than ever different heterodox approaches to macroeconomics.
Now and then, we might hear from diverse people, especially politicians, about the terrible problem of trade deficit. Take for example the recent report by Bergsten which calls for a plan of action to force China to let its currency appreciate in order to have the US trade deficit diminished.