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Wednesday, December 04, 2013

'Microfoundations': I Do Not Think That Word Means What You Think It Means

'Microfoundations': I Do Not Think That Word Means What You Think It Means

Brad DeLong responds to my column on macroeconomic models:

“Microfoundations”: I Do Not Think That Word Means What You Think It Means

The basic point is this:

...New Keynesian models with more or less arbitrary micro foundations are useful for rebutting claims that all is for the best macro economically in this best of all possible macroeconomic worlds. But models with micro foundations are not of use in understanding the real economy unless you have the micro foundations right. And if you have the micro foundations wrong, all you have done is impose restrictions on yourself that prevent you from accurately fitting reality.
Thus your standard New Keynesian model will use Calvo pricing and model the current inflation rate as tightly coupled to the present value of expected future output gaps. Is this a requirement anyone really wants to put on the model intended to help us understand the world that actually exists out there? ...
After all, Ptolemy had microfoundations: Mercury moved more rapidly than Saturn because the Angel of Mercury left his wings more rapidly than the Angel of Saturn and because Mercury was lighter than Saturn…

    Posted by on Wednesday, December 4, 2013 at 08:53 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (14)

          


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