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A Macroeconomic Earthquake | Q&A with Larry Christiano

In this episode of “Where is the General Theory of the 21st Century?”, we talk to Professor Lawrence J. Christiano, chairman of the Department of Economics and Professor of Economics at Northwestern University and one of the leading researchers in Macroeconomics and DSGE models.


Political Economy and Economics

Q: Working on this project, I have been thinking what we could add to mainstream macro models. Maybe we should add certain political economy factors in macro models? In recent years, We can see that political conflicts in Washington can, in fact, be a major factor that makes economic policy less effective than we have expected. Do you think we should consider incorporating political economy in the models?

C: It’s interesting that you’ve raised this question. I am chairman of the economics department and one of the things that I think about is: “Are we doing a good job in undergraduate education?” One thing that is bothering me is precisely the question that you are raising. Somehow the political economy has been pulled out of the economics, and there are many things that can’t be understood without bringing in the political economy. For example, US policies on globalization make no sense unless you understand the political economy. The outcome of the election last November, that’s going to have a big economic impact. Obviously, that is political economy.

In the case of undergraduate education, I am trying to figure out how to make courses integrate political economy with normal economics, to think about things like globalization, inequality, energy policy, global warming, etc.

I am saying all of this as a way to tell you that I completely agree with your puzzlement. “Hey, why isn’t political economy part of the picture?” By the way, in the 19 century, it was. Somebody pull the political economy out of the economics. I am not sure why. But I do think that this is an important thing. In growth theory, for example, political economy is very important. Actually, there is a very good paper by Jose-Victor Rios-Rull and Per Krusell on the AER [
On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model
] many years ago, they tried to explain why it is that sometimes for long period of time societies are more open to new ideas, and then for a long period of time the same society is less open to new ideas. They have a beautiful political economy model, again a DSGE model, for thinking about that. I do think that we need to integrate those kinds of things.

Although people have written down models which integrate political economy and economics, that is at a much lower level of development than, for example, the integration of financial sector into macro models. But I agree with you, this is a very important thing and it is very strange that it hasn’t been done very much up until now. It’s a mistake.

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