The IMF and new open economy macroeconomics

The IMF is soon to have a new economic counsellor. The position coincides with its research directorship. The counsellor (Olivier Blanchard) is a leading figure in new open economy macroeconomics (NOEM), as was a former high profile occupant in the late 1990s (Kenneth Rogoff).

The IMF's commitment to leading NOEM figures is interesting in terms of the direction it seems to want to move its research. Very roughly, NOEM papers have attempted to model economies starting from the behaviour of individual consumers and companies, then aggregate the behaviours to get a behaviour for a whole economy, then combine them with other (often one other) economies with the same underlying behaviour to see what happens. Their markets tend to exhibit classical behaviour on a small scale but Keynesian behaviour on large scales.

NOEM may be viewed as a step towards perfection of the neo-classical synthesis, which attempts to combine Keynesian and classical views of economies. Other schools of thought reject the neo-classical synthesis for various reasons. One point of concern I have about NOEM, even though it is impressive and has begun to attract some appealing empirical estimation, is that it is necessarily limited by the speed at which innovations in it emerge. I am not an expert on the field, but I do not think debt is adequately incorporated in NOEM models yet. So even with the full NOEM literature, much is uncertain about one of the world economy's major challenges.