Ok, so some of the best economists, trained at elite institutions, working for the pinnacle of the of the financial world got it wrong, very wrong. How wrong? Just go ask a Greek citizen. But, of course, we all knew that just by reading the headlines coming out of Greece over the last couple of years. We also knew this because most of the best elite trained economists thought everything was doing swimmingly back in 2006 early 2007.
Why? because they assumed rational expectations and that their models were correct. And when, after the crisis and it was clear that rational expectations and their models were hopelessly flawed they picked themselves up and did some hard reflecting on rational expectations and their models and a new paradigm was ushered in, right? Nope. Barely a micron of dust had settled on their DSGE models and they pressed them into the service of humanity playing the role of an underwriting service to the neoliberal restructuring (crushing?) of Greece. Pace Olivier Blanchard of the IMF:
In a box published in the October 2012 World Economic Outlook (WEO; IMF, 2012b), we focused on this issue by regressing the forecast error for real GDP growth on forecasts of fiscal consolidation. Under rational expectations, and assuming that forecasters used the correct model for forecasting, the coefficient on the fiscal consolidation forecast should be zero. If, on the other hand, forecasters underestimated fiscal multipliers, there should be a negative relation between fiscal consolidation forecasts and subsequent growth forecast errors. In other words, in the latter case, growth disappointments should be larger in economies that planned greater fiscal cutbacks. This is what we found.
It would have been more refreshing if the sentence in bold in the quote read:
If, on the other hand, the assumption of rational expectations and indeed the models themselves were bogus leading to low ball-estimates of the multipliers then needless suffering of millions would be the result. This is what we found.
Of course such strident candour is sadly not welcome in most institutions least of all at the IMF. Anyway, such is the health of state of the art Macro. Do continue on gentlemen.