Clothes for the Emperor or Can Research Learn from Undergraduate Macroeconomics?

SUMMARY The current crisis is not only one of financial markets, but also of macroeconomics. Leading scholars call for a paradigm shift away from dynamic general equilibrium models, though some argue that the profession's arsenal already contains the tools and historical lessons needed to deal with such crises. Taking this view to the limit, we demonstrate that the workhorse models of undergraduate macroeconomics not only permit a refined view and classification of financial crises. These models also identify scenarios under which either policymakers would be ill advised to follow conventional prescriptions, or under which full‐scale depressions loom that call for a coordination of monetary and fiscal policy.