Students are often surprised to learn that research in macroeconomics is quite different from what they might infer from mainstream media or even from undergraduate courses. In contrast to the familiar Keynesian paradigm that informs most public discussion of 'the economy', modern macroeconomics emphasises building up models of aggregate behaviour by adding up the behaviour of individual households or people.
The essential problem of macroeconomics as a science is to infer the underlying deep or permanent structure of economies from the fleeting behavioural patterns we observe in existing economies. Basing economic policy on the deep structure may help us avoid costly policy mistakes from the past, such as relying on inflation and government borrowing to stabilise employment, or ignoring the perverse incentives created for financial institutions in the run-up to the recent global financial crisis.
The research areas of our group illustrate this more precisely:
- Macroeconomics and the family: Non-economists may be reluctant to think of marriage, fertility and divorce as having much to do with economics at all. However, economists have had a good deal of success in explaining the paradox that while people want to have children, higher income leads to fewer children. The key appears to be the fact that children become more costly as income increases. Similarly, the recent decline of marriage appears to be driven at least in part by a fall in the gains to the specialisation that until recently resulted in wives specialising in non-market work. Such changes have a fundamental impact at the aggregate level. Indeed, one of the first (and most famous) predictions of macroeconomics was that per capita income could never rise above subsistence levels because fertility would rise in response to an increase in income, contrary to both the last two centuries of economic progress and to the more recent economic theories of the family.
- Business cycles, macro-finance and stabilisation policy: How do asset prices and the aggregate economic activity affect each other? For example, the behaviour of mortgage rates (and the form of mortgage contracts) affects residential investment over the business cycle. Mortgage rates are, in turn, affected by the dynamics of the entire yield curve, which depend on current and future monetary policy and the state of the macroeconomy. Understanding how exactly these variables are related to each other through optimal decision-making by households, firms and policymakers lies at the heart of effective monetary and fiscal policies. The group also researches how fiscal policy should respond to changes in economic activity and the relationship between demographics and the business cycle.
Research highlights
- Chiara Forlati's research interests are Macroeconomic Theory, Monetary Economics, Open Economy Macroeconomics and International Trade.
- Michael Hatcher's research interests are dynamic general equilibrium models, monetary policy, government debt, asset pricing. His research projects are short versus long-term government debt and optimal fiscal consolidation in a public pensions crisis.
- Alessandro Mennuni recently returned from EUI, where he was a Max Weber Fellow. His research is divided in three parts: the study of optimal fiscal policy over the business cycle; the study of the links between the composition of the labour force and aggregate business cycle fluctuations; and the development of a computational technique which consists of applying perturbation methods at several points over the transition path. This methodology breaks the curse of dimensionality and enables to solve large-scale models with accuracy over all the relevant part of the state space.