benoit cœure : which models do we need in times of crisis? speech by mr benoit cœure, member of the executive board of the european central bank, at the bank of france, cepremap, federal reserve bank of atlanta and centre d ’ analyse strategique international conference on “ macroeconomic modeling in times of crisis ”, paris, 26 october 2012. * * * i would like to thank peter mcadam for his contributions to these remarks. i remain solely responsible for the opinions expressed herein. ladies and gentlemen, i would like to thank the organisers for inviting me to this conference. we are living in extraordinary times. unprecedented challenges call for bold policy action, but the bolder we are, the more we need solid, principle - based policy analysis. this is all the more challenging as the crisis has also exposed weaknesses in our existing tools. this conference gives us a chance to reflect on the lessons that can be learnt and on how we can proceed. let me share a few ideas based on the ecb ’ s experience. prominent economists – akerlof and shiller, buiter, krugman and mankiw, 1 as well as popular opinion2 – have concluded ( from different perspectives ) that the current generation of micro - founded theory - based models have somehow taken a wrong turning. others – among them kocherlakota, lucas and woodford3 – have reached a more positive assessment. others still ( such as john taylor ) point less to models and more to policy : specifically, the failure to adhere to the policy rules derived from those same models. 4 the truth probably lies somewhere in between. thus, i take the view that while we should acknowledge the contribution of our models, we must likewise acknowledge their limitations and make improvements. it ’ s worth reminding ourselves where we are and what ’ s been achieved. policy interventions by the ecb, the federal reserve system and other central banks – lowering policy rates to historic lows and employing non - standard measures such as infinitely - elastic liquidity provision or the ecb ’ s new “ outright monetary transactions ” – have certainly eased financial market pressures. although we are still grappling with tensions in credit and sovereign debt markets, and with the painful adjustment of our economies, the financial system is recovering and we are working hard to strengthen that process. in addition, banks are replenishing their capital buffers and the institutional foundations of the euro are being strengthened, e

. g. references : buiter. w. ( 2009 ) : “ the unfortunate uselessness of most ‘ state of the art ’ academic monetary economics ”, financial times, 3 march 2009 ; akerlof, g. and shiller, r. ( 2009 ) : “ animal spirits : how human psychology drives the economy, and why it matters for global capitalism ”, princeton university press ; krugman, p. ( 2010 ) : “ the international finance multiplier ”. new york times, 22 march. mankiw, n. gregory ( 2006 ) : “ the macroeconomist as scientist and engineer ”, the journal of economic perspectives 20 ( 4 ) : 29 - 46. 23. kay, j. ( 2011 ) : “ the map is not the territory : an essay on the state of economics ”, available at http : / / www. johnkay. com / 2011 / 10 / 04 / the - map - is - not - the - territory - an - essay - on - the - state - of - economics. for example, see woodford ’ s recent essay “ what ’ s wrong with economic models? ”, institute for new economic thinking, research note 9, 2012. lucas, r. ( 2009 ) : “ in defence of the dismal science ”, economics focus section, economist 6 aug. kocherlakota, narayana ( may 2010 ) : “ modern macroeconomic models as tools for economic policy ”, banking and policy issues magazine. federal reserve bank of minneapolis. http : / / www. minneapolisfed. org / publications _ papers / pub _ display. cfm? id = 4428. john taylor has argued that protracted departures from well - known normative policy prescriptions based on consensus macroeconomic models ( such as those based on the “ taylor rule ” ) have contributed to the crisis. taylor, j. ( 2009 ) : “ getting off track : how government actions and interventions caused, prolonged, and worsened the financial crisis ”, hoover institution press publication. bis central bankers ’ speeches through the fiscal compact and the forthcoming banking union, together with improved regulatory frameworks. these decisions have not been taken in an intellectual vacuum. the notion that the great recession would have exposed fundamental flaws in economic theory can be firmly dispelled. it is my conviction that more than ever – and here i quote john maynard keynes – “ madmen in authority … are distilling their frenzy from some