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Sunday, September 02, 2012

'Arguments for Ending the Microfoundations Hegemony'

Simon Wren-Lewis lists and discusses five arguments for abandoning the microfoundations approach to macro modeling, and instead modeling economic relationships at the aggregate level, and then remarks:

While this post lists all the reasons why sometimes starting with aggregate models would be a good idea, I find it much more difficult to see how what I suggest might come about. Views among economists outside macro, and policy makers, about the DSGE approach can be pretty disparaging, yet it is unclear how this will have any influence on publications in top journals. The major concern amongst all but the most senior (in terms of status) academic macroeconomists is to get top publications, which means departing from the DSGE paradigm is much too risky. Leaders in the field have other outlets when they want to publish papers without microfoundations (e.g. Michael Woodford here).
Now if sticking with microfoundations meant that macroeconomics as a whole gradually lost relevance, then you could see why the current situation would become unsustainable. Some believe the recent crisis was just such an event. While I agree that insistence on microfoundations discouraged research that might have been helpful during and after the crisis, there is now plenty of DSGE analysis of various financial frictions (e.g. Gertler and Kiyotaki here) that will take the discipline forward. I think microfoundations macro deserves to be one of, if not the, major way macro is done. I just do not think it is the only route to macroeconomic wisdom, but the discipline at the moment acts as if it is.

I've made a similar argument, e.g. "we need to push the DSGE structure as far as we can and see if it can be satisfactorily amended. Ask the right questions, and use the tools and techniques associated with modern macro to try to build the right models. But it's not at all clear that the DSGE methodology is up to the task, so let's not close our eyes -- or worse actively block -- the search for alternative theoretical structures."

    Posted by on Sunday, September 2, 2012 at 02:45 PM Permalink  Comments (13)


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