Following the greatest economic depression since the 1930s, the grand old man of modern economic growth theory, Nobel laureate Robert Solow, on July 20, 2010, gave a prepared statement on “Building a Science of Economics for the Real World” for a hearing in the U. S. Congress. According to Solow modern macroeconomics has not only failed at solving present economic and financial problems, but is...

The representative agent model (RA) has dominated macroeconomics for the last thirty years. This model does a reasonably good job of explaining the co-movements of consumption, investment, GDP and employment during normal times. But it cannot easily explain movements in asset prices. Two facts are hard to understand 1) The return to equity is highly volatile and 2) The premium for holding equit...

We develop analytic asymptotic methods to characterize time series properties of nonlinear dynamic stochastic models. We focus on a stochastic growth model which is representative of the models underlying much of modern macroeconomics. Taking limits as the stochastic shocks become small, we derive a functional central limit theorem, a large deviation principle, and a moderate deviation principl...

This paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs, and by encouraging firms to create those jobs. We use a quantitative model to investigate whether this effect is comparable in magnitude to the standard moral hazard effects of unemployment insurance. Our model economy captures the behavior of the U.S. labor market...

Macroeconomic analysis has been relatively neglected by Austrian economists since the beginning of the Austrian revival in the early 1960s with the publication of Murray N. Rothbard’s Man, Economy, and State (1993)1 and America’s Great Depression (2000). Rothbard’s treatise contained new and improved elaborations of the Austrian theories of money, capital, and business cycles. In particular Rot...

The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework — the New Neoclassical Synthesis — grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research a...

Ludwig von Mises established the foundations of modem Austrian economics while Irving Fisher established the foundations of modem mainstream macroeconomics and central bank policy. Fisher helped create and was a proponent of mathematical economics, statistics and index numbers, and a monetary policy that I "stabilized" the value of the dollar. Fisher claimed that his scientific approach t estab...