To continue some random thoughts about the role of microeconomics in macro, consider the notion of a balance sheet recession. Like most others who came to see this as an essential ingredient of the current crisis, my route was via the financial balances framework—for instance, the Wynne Godley version. I saw the problem in aggregate/net terms: the US household sector in the mid 00's was running up unsustainable debt loads, especially through the medium of the housing bubble.
This is a purely macroeconomic perspective, and one can go a long way with it. Nevertheless, one can go even further by filling out some of the microeconomic aspects.
One that has attracted a lot of attention is the role of inequality between households. This takes us from net to gross balances: the accumulation of large debts among some households adds fragility and eventually drag to the system notwithstanding the net wealth accumulation of other households. The inequality/debt nexus has been examined at a purely macro level, but to dig further we would need to disentangle the threads: which households in particular are going into hock, what motivates them to do this, how are collateral constraints imposed or lifted, etc. Even with statistical controls, aggregate analysis can only point to association, not causal pathways.
But there are other micro aspects to household balances that are worth exploring. Some that occur to me are:Dorman poses some good questions that he claims require empirical answers, therefore disaggregation to the micro level in order to answer.
Read the rest at Econospeak
Macro and Micro: The Case of Balance Sheet Recessions
by Peter Dorman | Evergreen State, Olympia WA
(h/t Mark Thoma)