Since the early 1980s, the financial cycle has re-emerged as a major force driving the macroeconomy, but economic analysis has not caught up. This column argues that macroeconomics without the financial cycle is like Hamlet without the Prince. Economic analysis and policies – monetary, fiscal, and prudential – should be adjusted to fully account for the financial cycles, but here more analytic work is needed. The question of how we address the bust and balance-sheet recession that follow the boom deserves special attention.
VOXMacroeconomics and the financial cycle: Hamlet without the Prince?
Claudio Borio | Deputy Head of the Monetary and Economic Department and Director of Research and Statistics, Bank for International Settlements
BIS finally getting with it? While encouraging, Borio's post reveals that while he has recognized the problem and begun to come to grips with it, he has not realized yet that it has been addressed and largely resolved. Someone please direct him over to Levy Institute.