The current global crisis has not only strikingly showed the importance of banking and financial markets for the dynamics of real economies, it has also turned to be a “natural experiment” for the economic analysis, showing the deep inadequacy of the dominant theoretical framework.

The basic assumptions of mainstream DSGE models (e.g. optimizing behaviours, equilibrium, rational expectations, “representative agent”, etc.) are to a large extent responsible for the failure to forecast the crisis and seem also unable to propose a therapy to put back economies on a “good” growth path. In fact, the crisis sets a tall challenge also for alternative macroeconomic theories.

First of all, what are they? A crucial preliminary exercise involves the identification of the major building blocks of those theories which survived, at least in little enclaves, the extermination systematically organized by “new classical” fundamentalism.  They include various strands of “new Keynesianism” which builds on explicit microfoundation, often formalized by means of (myopically) maximizing agents, but at the same time taking seriously those informational asymmetries and coordination hurdles that are at the core of the original Keynesian message.  Indeed, the latter properties of any economic system – when taken seriously – can for a long way in accounting for multiplicity of macro equilibria (or dynamically, growth paths), as distinct  from those versions of “new Keynesianism” which one could call homeopathic Keynesianism.  That is, those following the theoretical prescription: add the minimum possible amounts of “frictions”, “menu costs”, “habits”, etc. to the DSGE in order to be able to account for the econometric evidence after unrestricted voodoo manipulations of the statistical evidence itself.
Since we are primarily interested in the ways ahead rather than beating a dead (but still very much kicking) horse, the workshop is not meant to identify the long list of shortcoming of the incumbent theory, but rather the achievements, limitations, challenges for alternative ones. Progressive new Keynesianism, as we might call it lacking a better word, of course include:

1. Greenwald-Stiglitz (1993) models with their emphasis on informational asymmetries and, in a few cases, ensuing multiple equilibria;
2. Coordination-failure models à la Cooper and John (1988);
3. Again, relatedly, models of relations between financial vs. real dynamics, à la Minsky, and financial fragility (e.g. Fazzari et al 2008);
4. Models involving some “bounded rationality”, even when the “boundedness” is relatively small but the theory takes it seriously (Akerlof and Yellen, 1985, is the ancestor but a few Ackerlof 2002 and 2007 develop the theme).
5. Other models more econometrically grounded have an explicit eye on estimations, and explicit links with models à la Phelps. A genre is highlighted by Goldberg and Frydman (2008).

At the other extreme, agent-based models with evolutionary roots, simply abhor the “new classical” (pseudo) microfoundations and try to derive several properties of macro dynamics and the underlying micro from evolving populations of heterogeneous agents (cf. Dosi, Fagiolo and Roventini, 2006, and 2008; and Gallegati et al., 2005).
Finally, a variegated set of (“post-Keynesian”) contributions remain far from neoclassical microfoundations and traces its roots directly to Keynes.
What is the state-of-the-art on these diverse fronts? A good deal of the workshop will be devoted to this issue.

Second, we think it is quite urgent to assess the state of the statistical evidence concerning (a) the properties of macroeconomic time series; (b) the relationship between the dynamics of such aggregate and the underlying microstatistical evidence; and (c) the circumstantial evidence on the transmission processes of fiscal and monetary shocks.  The bottom-up, data-drive, spirit of the exercise is indeed well in tune with the recommendation of the Dahlem Report (Colander et al, 2008).

Third, the seminar is meant to start reflecting about the relations between the foregoing alternative theories and the statistical evidence, if any.

Attendance:

This meeting is restricted to a small number of participants to discuss the various issues involved; it is going to be highly informal and is meant as preparation to a bigger event -where we intend to start also an urgently needed conversation on the policies measures required by the recent crisis - involving also a call for papers, to be held in the first part of 2010.

Date and location:

The meeting will take place on 22-23 July 2009 at the Sant’Anna School of Advanced Studies in Pisa (Italy)

Meeting organizers:

• Giovanni Dosi, LEM Sant’Anna School of Advanced Studies, Pisa
• Giorgio Fagiolo, LEM Sant’Anna School of Advanced Studies, Pisa
• Andrea Roventini, University of Verona
• Mauro Napoletano, OFCE
• Pietro Dindo, LEM Sant’Anna School of Advanced Studies, Pisa

Contact :

• giovanni.dosi-at-sssup.it (please replace "-at-" with "@").