Barro, Grossman, and the domination of equilibrium macroeconomics

Plassard, Romain (2021): Barro, Grossman, and the domination of equilibrium macroeconomics.

Abstract

Under which conditions did Robert Lucas’s microfoundational program come to dominate the field? My article sheds new light on this question. The focus is on why models incorporating rational expectations and market-clearing seduced macroeconomists. My case study is Robert Barro and Herschel Grossman. Drawing on Grossman’s archives, I define a framework for explaining their modeling choices. I show that methodological principles, tractability constraints, and research strategies explained why, at the end of the 1970s, Barro and Grossman preferred equilibrium over disequilibrium macroeconomics.

• Item Type: MPRA Paper
• Language: English
• Keywords: fluctuations, non-neutrality of money, fixed-price equilibrium models, contract theory, disequilibrium macroeconomics, equilibrium macroeconomics
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B21 - Microeconomics; B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics; B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B23 - Econometrics ; Quantitative and Mathematical Studies; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

References

Alchian, A. (1970). Information Costs, Pricing and Resource Unemployment. In Phelps et al. Microeconomic Foundations of Employment and Inflation Theory. London: Macmillan, pp. 27-52.

Arrow, K.J. (1959). Towards a theory of price adjustments. In M. Abromovitz (ed.). The Allocation of Economic Resources. Stanford: University of California Press, pp. 41-51.

D’Autume, A. (1980). Équilibres non-walrassiens et macro-économie. Thesis submitted for the degree of Doctor in Economics, Paris II University.

D’Autume, A. (1983). Répartition et accumulation en déséquilibre. Cahiers Lillois d’Économie et de Sociologie, 2.

D’Autume, A., and Philippe, Michel. (1984). Évaluation du capital en présence de contraintes anticipées sur les achats de biens d’investissement. Annales de l’INSEE, 54, pp. 101-114.

D’Autume, A. (1985). Monnaie, Croissance et Déséquilibre. Paris : Economica, Approfondissement de la Connaissance Économique.

D’Autume, A., and Philippe, Michel. (1985a). Épargne, investissement et monnaie dans une perspective intertemporelle. Revue Économique, 35, n°2.

D’Autume, A., and Philippe, Michel. (1985b). Future investment constraints reduce present investment. Econometrica, 53, 1, pp. 203-206.

D’Autume, A. (1986). Les anticipations rationnelles dans l’analyse macro-économique. Revue Économique, 37 (2), pp. 243-284.

D’Autume, A., and Philippe, Michel. (1986). Déséquilibre général et investissement. Annales d’Économie et de la Statistique, 1, pp. 23-51.

D’Autume, A., and Philippe, Michel. (1993a). Endogeneous growth in Arrow’s learning by doing model. European Economic Review, 37 (6), pp. 1175-1184.

D’Autume, A., and Philippe, Michel. (1993a). Hystérésis et piège du sous-développement dans un modèle de croissance endogène. Revue Économique, 44 (2), pp. 431-450.

D’Autume, A., and Philippe, Michel. (1993a). Éducation et croissance. Revue d’Économie Politique, 104 (4), pp. 457-499.

Azariadis, C. (1975). Implicit Contracts and Underemployment Equilibria, Journal of Political Economy, 83, pp. 1183-1202.

Backhouse, R.E., and Mauro, Boianovsky. (2013). Transforming Modern Macroeconomics: Exploring Disequilibrium Microfoundations 1956-2003. Cambridge: Cambridge University Press.

Baily, M.N., (1974). Wage and Employment under Uncertain Demand. Review of Economic Studies, 41, pp. 37-50.

Barro, R.J., and Grossman, H.I. (1971). A general disequilibrium model of income and employment, American Economic Review, 61, pp. 82-93.

Barro, R.J., and Grossman, H.I. (1974). Suppressed Inflation and the Supply Multiplier. The Review of Economic Studies, 41 (1), pp. 87-104.

Barro, R.J., and Grossman, H.I. (1974). Suppressed Inflation and the Supply Multiplier, Review of Economic Studies, 41, pp. 87-104.

Barro, R.J., and Grossman, H.I. (1976). Money, Employment, and Inflation. Cambridge University Press: London.

Barro, R.J., and Fisher, S. (1976). Recent developments in monetary theory. Journal of Monetary Economics, 2, pp. 133-167.

Barro, R.J. (1976). Rational Expectations and the Role of Monetary Policy. Journal of Monetary Economics, 2, pp. 1-32.

Barro, R.J. (1977a). Unanticipated Money Growth and Unemployment in the United States, The American Economic Review, 67 (2), pp. 101-115.

Barro, R.J. (1977b). Long-Term Contracting, Sticky Prices, and Monetary Policy, Journal of Monetary Economics, 3, pp. 305-316.

Barro, R.J. (1978). Unanticipated Money, Output, and the Price Level in the United States, Journal of Political Economy, 86 (4), pp. 549-580.

Barro, R.J. (1979). Second Thoughts on Keynesian Economics, The American Economic Review, 69 (2), pp. 54-59.

Barro, R.J. (1980). [Comment on] Unemployment, Employment, and Export in British Manufacturing: A Non-Clearing Approach by Muellbauer and Winter. European Economic Review, 13 (3), pp. 411-412.

Barro, R.J and Hercowitz, Z. (1980). Money Stock Revisions and Unanticipated Money Growth, Journal of Monetary Economics, 6, pp. 257-267.

Barro, R.J. (1981). Money, Expectations, and Business Cycles. New York: Academic Press.

Barro, R.J., and Grossman, H.I. (1982). Money, Employment, and Inflation. Japanese Translation, McGraw-Hill Kogakusha Ltd.

Barro, R.J. (1984). Macroeconomics. 1st ed. New-York: Wiley.

Blanchard, O. (2000). What do we know about macroeconomics that Fisher and Wicksell did not? Quarterly Journal of Economics, 115(4), pp. 1375-1409.

Blanchard, O. (2003). Macroeconomics, 3rd ed. London: Pearson Education.

Bodkin, R.G., (1969). Real Wages and Cyclical Variations in Employment, Canadian Journal of Economics, 2, pp. 353-374.

Boschen, J. and Grossman, H.I. (1980). Tests of Equilibrium Macroeconomics Using Contemporaneous Monetary Data, Journal of Monetary Economics, 8, pp. 309-333.

Carin, B. (1972). Dynamics of Disequilibrium in Alternative Exchange Rate Regimes. Thesis submitted for the degree of Doctor in Economics, Brown University.

Clower, R.W. (1965). The Keynesian Counter-Revolution: A Theoretical Appraisal, in The Theory of Interest Rates, ed. F.H. Hahn and F.P.R Brechling [1965], pp. 103-125, Reprinted in Walker [1984], pp. 34-58.

De Vroey, M. (2016). A History of Macroeconomics from Keynes to Lucas and Beyond, Cambridge University Press.

Drazen, A. (1980). Recent developments in macroeconomic disequilibrium theory. Econometrica, 86, pp. 505-516.

Gray, J.A. (1976). Wage Indexation: A Macroeconomic Approach, Journal of Monetary Economics, 2, pp. 221-235.

Grossman, H.I., (1971). Money, Interest, and Prices in Market Disequilibrium. Journal of Political Economy, 79 (5), pp. 403-413.

Grossman, H.I., (1973). Aggregate Demand, Job Search, and Employment. Journal of Political Economy, 81, pp. 1353-1369.

Grossman, H.I., (1973). The Cyclical Pattern of Unemployment and Inflation. Economics, 41 (164), pp. 403-413.

Grossman, H.I., (1975). Discussion. Third Reisenburg Symposium on the Stability of Contemporary Economic Systems.

Grossman, H.I., (1979a). Why Does Aggregate Demand Fluctuate? The American Economic Review, 69 (2), pp. 64-69.

Grossman, H.I., (1979b). Employment Fluctuation and the Mitigation of Risk. Economic Inquiry, 17, pp. 344-359.

Grossman, H.I. (1983). The Natural-Rate Hypothesis, the Rational-Expectations Hypothesis, and the Remarkable Survival of Non-Market-Clearing Assumptions, Carnegie-Rochester Conference Series on Public Policy, 19, pp. 225-246.

Duarte, P-G. (2012). Not Going Away? Microfoundations in the Making of a New Consensus in Macroeconomics. In Duarte, Pedro Garcia & Lima, Gilberto Tadeu (Eds.). Microfoundations Reconsidered: The Relationship of Micro and Macroeconomics in Historical Perspective. Cheltenham: Edward Elgar, pp. 190-237.

Fisher, S. (1977). Wage Indexation and Macro-Economic Stability, Journal of Monetary Economics, pp. 107-147.

Hahn, F. (1977). Exercises in Conjectural Equilibria. Scandinavian Journal of Economics, 79, pp. 210-226.

Hahn, F. (1978). On non-Walrasian Equilibria. Review of Economic Studies, 45, pp. 1-17.

Hoover, K. (1988). The New Classical Macroeconomics: A Skeptical Inquiry. Oxford: Blackwell.

Hoover, K. (2012). Microfoundational Programs. In Duarte, Pedro Garcia & Lima, Gilberto Tadeu (Eds.). Microfoundations Reconsidered: The Relationship of Micro and Macroeconomics in Historical Perspective. Cheltenham: Edward Elgar, pp. 19-61.

Howitt, P. (1979). Evaluating the non-market clearing approach. American Economic Review, 69, pp. 60-63.

Iwai, K. (1981). Disequilibrium Dynamics: Theoretical Analysis of Inflation and Unemployment, Yale University Press.

King, R. (1980). Asset Markets and the Neutrality of Money. Thesis submitted for the degree of Doctor in Economics, Brown University.

King, R., and Trehan, B. (1984a). Money: Endogeneity and Neutrality. Journal of Monetary Economics, pp. 385-393.

King, R., and Plosser, C.I. (1984b). Money, Credit, and Prices in a Real Business Cycle. American Economic Review, 74 (3), pp. 363-340.

Kuh, E. (1966). Unemployment, Production Functions, and Effective Demand, Journal of Political Economy, 74, pp. 238-249.

Kydland, F.E., and E.C., Prescott. (1982). Time to Build and Aggregate Fluctuation. Econometrica, 50 (6), pp. 1345-1370.

Leijonhufvud, A. (1968). On Keynesian economics and the Economics of Keynes. Oxford University Press: New York.

Lucas, R.E., Jr. (1972). Expectations and the Neutrality of Money, Journal of Economic Theory, 4, pp. 103-124.

Lucas, R.E., Jr. (1975). An Equilibrium Model of the Business Cycle, Journal of Political Economy, 83, pp. 1113-1144.

Lucas, R.E., Jr. (1977). Understanding Business Cycles, in Stabilization of the Domestic and International Economy, K. Brunner and A. Meltzer, eds., New York: North Holland.

Mankiw, N.G. (1990). A quick refresher course in macroeconomics. Journal of Economic Literature, 28, pp. 1645-1660.

Mortensen, D.T., (1970). A Theory of Wage and Employment Dynamics, in E.S. Phelps, et al., Microeconomic Foundations of Employment and Inflation Theory. Norton: New York.

Muellbauer, J. and Winter, D. (1980). Unemployment, Employment, and Exports in British Manufacturing: A Non-Clearing Markets Approach, European Economic Review, 13 (3), pp. 383-409.

Negishi, T. (1979). Micro-Economic Foundations of Keynesian Macro-Economics. Amsterdam: North-Holland.

Patinkin, D. ([1956] 1965). Money, Interest and Prices. 2nd ed. New-York: Harper & Row.

Phelps, E.S. (1970). Seven Schools of Macroeconomic Thought. Oxford: Clarendon.

Phelps, E.S. (1990). Preface. In Phelps et al. Microeconomic Foundations of Employment and Inflation Theory. London: Macmillan, pp. vii-viii.

Plassard, R. (2017). Disequilibrium as the Origin, Originality, and Challenges of Clower’s Microfoundations of Monetary Theory. The European Journal of the History of Economic Thought, 24 (6), pp. 1388-1415.

Plassard, R. (2018). Clower’s Volte-Face regarding the ‘Keynesian Revolution’, History of Political Economy, 50 (2), pp. 261-287.

Plassard, R., Goulven, Rubin., and Matthieu, Renault. (2021). Modeling Market Dynamics: Jean-Pascal Bénassy, Edmond Malinvaud, and the Development of Disequilibrium Macroeconomics. History of Economic Ideas. Forthcoming.

Plassard, R. (2021). Not tractable enough: The Rise and Fall of Fixed-Price Equilibrium models. Working Paper.

Romer, P. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, 94 (5), pp. 1002-1037.

Sargent, T. and N., Wallace. (1975). Rational Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule. Journal of Political Economy, 83, pp. 241-254.

Sargent, T. (1982). Beyond Demand and Supply Curves in Macroeconomics. The American Economic Review, 72 (2), pp. 382-389.

Sellier, F. and C. Zarka (1966). International Differences in Factors Affecting Labor Mobility, International Labor Organization: Geneva.

Wigniolle, B. (2019). En hommage à Antoine D’Autume. Revue d’Économie Politique, 5, pp. 661-673.

Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics, Available from http://www.columbia.edu/mw230/macro20C.pdf

Young, W. (2014). Real Business Cycle Models in Economics. Routledge.