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FINANCIAL SHOCKS, UNEMPLOYMENT AND PUBLIC POLICY

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Abstract

This paper reviews key features of the 2007–08 financial crisis, ‘Great Recession’ and European public debt problem. In the light of these it discusses new avenues of research that have opened up. A large body of opinion supports continued research within the dynamic stochastic general equilibrium (DSGE) paradigm, dealing incrementally with inter alia financial frictions, heterogeneous agents, and more descriptively realistic models of wage and price adjustment than ‘Calvo contracts’. However, the crisis has boosted more radical approaches to money and finance, modelling bubbles in asset prices, and taking forward insights from psychological research and experimental and behavioural economics.

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