User:Sschecht/sandbox/GEM Project

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GEM Project is an online platform designed to rebuild macroeconomics in order to better advise central banks. The need became apparent during the 2007-09 Great Recession, as policymakers decried the failure of mainstream macroeconomics to support them in effectively dealing with the crisis:

“I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world. In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with the fast-evolving circumstances. Macroeconomics should have been able to provide that playbook. It could not.”^[1]
— Narayana Kocherlakota, President - Federal Reserve Bank of Minneapolis & member of the Federal Reserve’s monetary policy committee, Federal Reserve Bank of Minneapolis: 2009 Annual Report

“When the crisis came, the serious limitations of existing economic and financial models immediately became apparent. Macro models failed to predict the crisis and seemed incapable of explaining what was happening to the economy in a convincing manner. As a policymaker during the crisis, I found the available models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”^[2]
— Jean-Claude Trichet, President - European Central Bank, 2010 Speech opening the ECB's annual Central Banking Conference

The central contribution of Generalized Exchange Macroeconomics (GEM) is the derivation of meaningful wage rigidity - the fundamental, long unsolved puzzle in economics.^[3] ^[4] ^[5] That innovation explains how adverse nominal disturbances induce involuntary job loss, which is necessary for credibly justifying central bank intervention in aggregate demand.

GEM Project is composed of an eBook, weekly blog, and research paper exchange. The website version was launched in April 2015.

eBook

According to the GEM Project website:

“The GEM eBook rigorously develops Generalized-Exchange Macroeconomics. It is ambitious, intended to reconfigure modern theory. Unlike mainstream modeling, the new approach microfounds the full range of effective stabilization policymaking, while still satisfying the strict methodological standards of the academy.
The GEM Project is a dauntingly-broad work in progress. There are many places for errors to hide. Our hope is that readers will find them. Comments are invited.”^[6]

Rather than publishing a traditional book, the GEM Project website quickly disseminates its founding theory via an eBook, encouraging crowd-sourced vetting and collective effort on a research agenda both rigorous and stabilization-relevant.^[7]^[8]

The open-source format is novel for economics, as the traditional medium for exchanging and accepting economic ideas is admission into peer-reviewed journals. (GEM Project is a peer-reviewed website.)

The eBook is available for free download as a PDF and in tablet-friendly formats.

Blog

The GEM Project weekly blog provides "in bite-sized portions" an overview of the GEM model and its monetary-policy implications.^[9]

Community

The Project encourages interaction. Economists can participate and contribute to the Project by:

commenting on the eBook,
commenting on blogs,
commenting on research papers hosted on the site,
submitting papers relevant to GEM Project to be hosted by the site, and
submitting a guest blog column.

Coherent & Stabilization-Relevant

GEM Project seeks to foster a community of economists who want to build macroeconomic models that are both coherent and stabilization relevant: “coherent” (as in, microfounded and internally consistent), so as to meet the strict methodological standards of the academy and provide a level of rigor desired by practitioners in order to justify large-scale policy measures, and “stabilization-relevant” (i.e. matching the evidence in the real-world), so that practitioners can go to the models for trustworthy, applicable advice.

Mainstream macro models, on the other hand, traditionally involve a choice between coherence and stabilization-relevance.^[10]^[11] For example, a number of New Keynesians assume that involuntary job loss and wage rigidities exist, but cannot explain them (failing on coherence)^[12], whereas New Classical/Real Business Cycle theorists ignore the existence of wage rigidities in order to maintain coherence, implying that all unemployment must be voluntary (failing on stabilization-relevance)^[13].

By modeling meaningful wage rigidities capable of inducing involuntary job loss, synthesizing them into a dynamic, stochastic theory of general equilibrium, and integrating the implications for monetary policy during instability, GEM Project serves to lead by example.

Organizers

GEM Project was founded by James Annable and Shani Schechter.

The theory was developed by Annable over a 50-plus-year career spanning academia, Federal Reserve and government policy work, and the private banking and insurance sector. Annable and Schechter joined forces after working together in the Federal Advisory Council, a body tasked by the original 1913 Federal Reserve Act to quarterly advise the Federal Reserve Board of Governors on a range of topics including monetary policy.

External links

GEM Project website

References

^ Narayana Kocherlakota (2010). “Modern Macroeconomic Models as Tools for Economic Policy.” The Region (Federal Reserve Bank of Minneapolis: 2009 Annual Report), pp. 5-21.
^ Jean-Claude Trichet (2010). Speech opening the ECB’s annual Central Banking Conference (November, 2010).
^ Hall, Robert E. (1980). "Employment Fluctuations and Wage Rigidity," in George L. Perry (ed.), Brookings Papers on Economic Activity 1, p. 91: "Although macroeconomists have puzzled over these characteristics ever since the discipline came into being, efforts redoubled in the 1970s to provide a solid economic rationale for the insensitivity of wages to current economic conditions and for the conspicuous deviations of employment from the smooth trend predicted by simple theories of economic growth."
^ Bernanke, Ben (2000). Essays on the Great Depression (Princeton: Princeton University Press), p.6. “… it seems that, of the two channels, slow nominal-wage adjustment (in the face of massive unemployment) is especially difficult to reconcile with the postulate of economic rationality. We cannot claim to understand the Depression until we can provide a rationale for this paradoxical behavior of wages.”
^ Groshen, Erica L. and Schweitzer, Mark E. (1996). "Macro- and Microeconomic Consequences of Wage Rigidity," FRB of Cleveland Working Paper No. 9607. Available at SSRN: http://ssrn.com/abstract=2550310
^ http://gemproj.org/ebook
^ http://gemproj.org/ebook
^ http://gemproj.org/category/papers
^ http://gemproj.org/blog
^ Lucas, Robert (1978). “Unemployment Policy,” American Economic Review (May), vol. 68, no. 2, pp. 353-357.
^ Hall, Robert E. (2007). “How Much Do We Understand about the Modern Recession?” Brookings Papers on Economic Activity (Issue 2), vol. 38.
^ Chari, V. V., Kehoe, Patrick, and McGrattan, Ellen (2009). “New Keynesian Models: Not Yet Useful for Policy Analysis,” American Economic Journal: Macroeconomics, (January), 1:1, pp. 242-266.
^ Christiano, Lawrence, Martin Eichenbaum, and Charles Evans (2005). “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,” Journal of Political Economy, 113(1), pp. 1-45.