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Five or six years ago, economists studied a period that they named “the Great Moderation.” In the period after World War II, and even more specifically from the mid 1980s to the mid 2000s, economic performance in the United States, Europe, and many countries had been relatively placid. These countries enjoyed respectable levels of long-run growth, experienced only mild recessions, and enjoyed low and stable inflation. Many observers felt that this performance was in large measure due to the fact that economists and policymakers had learned how to conduct effective monetary and fiscal policies. We learned from the mistakes of the Great Depression and knew how to prevent serious economic downturns. We also learned from the mistakes made in the 1970s and knew how to avoid inflationary policies.
To be sure, other countries still experienced their share of economic problems. Many countries in Latin America experienced currency crises and debt crises in the 1980s. Many countries in Southeast Asia suffered through painful exchange rate crises in the 1990s. Japan suffered a protracted period of low growth. Some countries saw hyperinflation, while others experienced economic decline. Still, for the most part, mature and developed economies experienced very good economic performance. Macroeconomics was becoming less about diagnosing failure and more about explaining success.
The last few years shook that worldview. The crisis of 2008 showed that a major economic catastrophe was not as unthinkable as economists and others hoped. The world experienced the most severe economic downturn since the Great Depression, and there was a period where it seemed possible that the crisis could even be on the same scale as the Great Depression. Countries like the United States and the United Kingdom faced protracted recessions. Countries such as Greece, Portugal, Ireland, and Iceland found themselves mired in debt crises. Spillovers and interconnections—real, financial, and psychological—meant that events like the bankruptcy of Lehman Brothers reverberated throughout the economies of the world.
Because it resurrected old problems, the crisis of 2008 also resurrected old areas of study in macroeconomics. The events in Europe have prompted economists to review the debate over common currencies and the conduct of monetary policy. There has been increased investigation of the size of fiscal policy multipliers. At the same time, macroeconomists are devoting much attention to topics such as the connection between financial markets and the real economy. But this difficult period for the world economy has also been an exciting time for macroeconomists. The study of macroeconomics has become more vital than ever—more alive and more essential.