What do macroeconomic shocks do to public and private saving? This column argues that it is only truly dramatic shocks that have a long-lasting effect on saving behaviour. Past crises tend to increase savings among households, but they also lead to decreased public-sector saving. However, the evidence suggests that this decrease in public saving is about a third of the magnitude than the corresponding increase in household saving.

There is a long list of culprits when it comes to assigning blame for the financial crisis. This column argues economists are among the guilty, having succumbed to an intellectual virus of theory-induced blindness. It adds this calls for an intellectual reinvestment in models of heterogeneous, interacting agents, following in the footsteps of other social scientists. This will require a sense of academic adventure sadly absent in the pre-crisis period.

In October 2011, Christopher Sims of Princeton University shared the Nobel Prize for economics with Thomas Sargent of New York University “for their empirical research on cause and effect in the macroeconomy”. This column by one of Professor Sims’ former students – now a distinguished professor – discusses the importance of his work.

The financial crisis and the ensuing recession have prompted reappraisals of macroeconomic theory. This column introduces Policy Insight No 53 authored by Axel Leijonhuvd that argues that it is time to stop thinking of the macroeconomy as an electrical circuit; we must think of an economy as an “open system” and adapt our methods to the nature of the economy.

The financial crisis and the ensuing recession have prompted reappraisals of the state of macroeconomic theory. CEPR Policy Insight No 53 argues that we have to think of an economy as an “open system” in the ontological sense and adapt out methods to the nature of an economy – to change how we do economics.

The extraordinary assumptions of macroeconomic models have left the outside world perplexed about what economists have been doing during the last few decades. This column contrasts the incongruous rational expectations top-down model with a bottom-up model where no individual is capable of understanding the full complexity of a market system. The bottom-up model creates correlations in beliefs that generate waves of optimism and pessimism. The latter produce endogenous business cycles akin to the Keynesian “animal spirits”.

Do the US and Europe risk repeating Japan’s lost decade? This column warns that if the US or European financial clean-ups falter, they will be vulnerable to recurring financial crises. It argues that macroeconomic models should not treat finance as an innocuous veil and calls for a new approach that places financial intermediaries at the centre of its models.