Greg Mankiw asks the following question to all aspiring (and practicing) macroeconomists:
You observe an economy sinking in recession. As this occurs, real interest rates are rising, and the currency is strengthening. What shock, or set of shocks, could have caused these events?
The question seems simple enough and you’d think after about 80 years of macroeconomics we’d have a pretty good idea of what the answer was. I just had a lengthy email conversation with an economist friend of mine who works on the theoretical underpinnings of DSGEs (Dynamic Stochastic General Equilibrium models), which are the latest and greatest in macroeconomics these days. Needless to say we didn’t get very far or else I wouldn’t be posting this.
Anyone want to take a crack at it? We’ll take answers from aspiring labor economists as well, I suppose.