Who is Leading the Change?

Innovation and influence of applied economists in the new discourse on macro-finance

by Matthias Thiemann

The transatlantic financial crisis was an event of historic proportions, not only severely disrupting Western economies, but also the predictions of leading academics and central bankers which had deemed the period preceding it as one of almost unparalleled mastery of the vagaries of the business cycle, leading to the « Great Moderation ». Events from 2007 onwards have brought into sharp relief these rosy self-assessments and its most important omission : the dangers of a procyclical financial system. How has economic discourse on finance changed since the financial crisis ? Who are the agents of change that in the last decade have introduced a new discourse of the crisis-proneness of the financial system and its potential negative impact on the macro-economy, known as macrofinance to the forefront of economic discourse?

​ This project sought to find out by applying bibliometric and sociographic analysis to a textual corpus of 142000 papers published in the top journals on finance and macroeconomics over the last three decades. We aimed to identify the main topics that emerged post-crisis as well as the carriers of these ideas, where they are employed and with whom they are collaborating. Based on a bibliometric and sociographic analysis of the corpus, we show that economists in central banks and international organizations have been very important ‘agents of change’ in this respect. Allying with academic economics working on financial intermediation, they have been overrepresented with respect to their overall presence in the corpus among the authors of very influential papers establishing the stylized facts of the macro-economy finance linkages, that locate risks to the macroeconomy in the pro-cyclical behavior of financial intermediaries.

This new view stands in stark contrast to the pre-crisis vision, based on the Efficient Market Hypothesis and the Rational Expectations DSGE framework, in which macroeconomic dangers from finance were simply not envisioned. Our co-citation analysis of the entire corpus shows that the new view, in particular work on heterogenous beliefs in asset markets and work on small open macroeconomies today connect topics on DSGE models and the work on financial market processes, filling a gaping hole in the knowledge of the contemporary macroeconomic discourse.

Based on interview material, we link this role of central bank economists to their work incentives in central banks, where post-crisis they had to produce academically sound work which could undergird and legitimate the new macro-prudential frameworks, which have been introduced at many central banks since the financial crisis. Macroprudential ideas required validation in the language of mainstream economics discourse, that is, through models and statistical findings that corroborates these models. This paper shows how this new discourse radiated into the mainstream professional discourse, thereby assigning a productive role to applied central bank economists in bringing about a more accurate empirical descriptions of the dangers for the macro-economy building up in financial markets.