The Great Recession and macroeconomic theory: a useless crisis?

The global financial crisis of 2007-2008 and the subsequent Great Recession have pushed many economists to acknowledge a fundamental limit in the theoretical models elaborated after the monetarist counter-revolution: these models neglect the financial system. The years following the Great Recession have thus been marked by the development of what can be called ‘Financial Frictions Approach’ based on the addition of the financial system to the New Keynesian DSGE model. The results of this line of research are beginning to appear also in macroeconomics textbooks. Significant examples are the publication of the seventh edition of Blanchard’s textbook (Blanchard 2017), and the publication of the third edition of the textbook co-authored by Blanchard, Amighini and Giavazzi (2017, hereafter BAG). The objective of this work is twofold: i) to show that the new model presented by Blanchard, Amighini and Giavazzi, which reflects the results of the Financial Frictions Approach, does not allow to elaborate a coherent explanation of the Great Recession and: ii) to present the pillars of an alternative theoretical model based on the lessons of Keynes, Schumpeter and Minsky