Summers on effective demand and DSGE

November 7, 2011

Last night, I read this piece in which Larry Summers was asked about the crisis and the role of the economics profession (and also about his work for Clinton and Obama).

His suggestion for the U.S. is to increase effective demand, like Keynes suggested a long time ago. Summers said: “If the private sector is either unable or unwilling to borrow and spend on a sufficient scale, then there is a substantial role for government in doing that.”

Summers also defended the role of the economics profession, but clearly stated his opinion about DSGE models. “However, Summers asserted, the dynamic stochastic general equilibrium models used by many economists, which often assume the economy will naturally return to a basic equilibrium with full employment, have been of little value in these complex times.”

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