One of the major issues in contemporary macroeconomics concerns monetary policy since the 2008 crisis. For many, if not most, of the major central banks, the conventional channels through which the money supply changes do not work anymore. For instance, by paying interest on reserves, the Federal Reserve has moved from adjusting the money supply to influencing the banks’ money demand. Some central banks have even maintained that money supply does not affect inflation anymore.
Regarding financial markets, policy makers have moved toward more regulation and more centralized management of how banks diversify their portfolios. Macroprudential policy seems to be the new norm. For policy makers, the financial breakdown of 2008 was not of their doing but the result of inherent market instabilities that call for new and stronger oversight. In the aftermath, they have moved toward more regulation and less market freedom.
Rather than doubling down on conventional modeling, a number of macroeconomists have been seriously questioning how the profession theorizes about macroeconomics. In the limit, some call for replacing conventional macro modeling with new approaches. Some have even suggested that Austrian business cycle theory (ABCT) is needed to understand the 2008 crisis.
Macroeconomic theorists and policy makers have taken different routes. For policy makers, the 2008 crisis is evidence that central banks need to do more. But, for a number of theorists, it is evidence that policy should be made differently.
Maybe it is time for policy makers to embrace the market process in money and banking, just as the profession does with respect to most other markets. Rather than moving toward more control of financial markets, central banks would do better by focusing on supporting financial institutions.