Macroeconomics at the Service of Public Policy

This volume uses state of the art models from the frontier of macroeconomics to answer key questions about how the economy functions and how policy should be conducted. The contributions cover a wide range of issues in macroeconomics and macroeconomic policy. They combine high level mathematics with economic analysis, and highlight the need to update our mathematical toolbox in order to understand the increased complexity of the macroeconomic environment. The volume represents hardevidence of high research intensity in many fields of macroeconomics, and warns against interpreting the scope of macroeconomics too narrowly. The mainstream business cycle analysis, based on dynamic stochastic general equilibrium (DSGE) modelling of a particular type, has been criticised for itsinability to predict or resolve the recent financial crisis. However, macroeconomic research on financial, information, and learning imperfections had not yet made their way into many of the pre-crisis DSGE models because practical econometric versions of those models were mainly designed to fit data periods that did not include financial crises. A major response to the limitations of those older DSGE models is an active research program to bring big financial shocks and various kinds offinancial, learning, and labour market frictions into a new generation of DSGE models for guiding policy. The contributors to this book utilise models and modelling assumptions that go beyond particular modelling conventions. By using alternative yet plausible assumptions, they seek to enrich our knowledgeand ability to explain macroeconomic phenomena. They contribute to expanding the frontier of macroeconomic knowledge in ways that will prove useful for macroeconomic policy.

Introduction
Part 1: Financial Crisis and Recovery
1. Is the Market System an Efficient Bearer of Risk?, Kenneth Arrow
2. The European Debt Crisis, Hans-Werner Sinn
3. The Stagnation Regime of the New Keynesian Model and Recent US Policy, George Evans
Part 2: Learning, Incentives, and Public Policy
4. Notes on Agents' Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy, George Evans, Seppo Honkapohja and Kaushik Mitra
5. Learning and Model Validation: An Example, In-Koo Cho and Kenneth Kasa
6. Bayesian Model Averaging, Learning, and Model Selection, George Evans, Seppo Honkapohja, Thomas J. Sargent, and Noah Williams
7. History Dependent Public Policies, David Evans and Thomas J. Sargent
8. Finite Horizon Learning, William Branch, George Evans and Bruce McGough
9. Regime Switching, Monetary Policy, and Multiple Equilibria, Jess Benhabib
10. Too Many Dragons in the Dragons' Den, Martin Ellison and Chryssi Giannitsarou
11. Impacts of Labor Taxation Reform Under Heterogeneous Domestic Labor Markets and Flexible Outsourcing, Erkki Koskela