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Three Challenges Facing Modern Macroeconomics

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Executive Summary

There are three great challenges facing researchers in modern macroeconomics today, all brought into sharp relief by the recent financial crisis. The first is to find more realistic, and yet tractable, ways to incorporate financial market frictions into the canonical models for analyzing monetary policy. The second is to rethink the role of countercyclical fiscal policy, particularly in the response to a financial crisis where credit markets seize. A third great challenge is to achieve a better cost-benefit analysis of financial market regulation.

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