Models vs. reality1 May, 2016 at 17:51 | Posted in Economics | 1 Comment
So by using a representative-agent, perfect-foresight, complete-markets model, David is ignoring a bunch of things that we know can totally change the answers to the exact policy questions David is thinking about.
So what should we do instead? One problem is that models with things like heterogeneity, stochasticity, and imperfect markets are a lot more complicated, and therefore harder to apply in quick or casual way. If we insist on using models with those elements, then it’s going to be very hard to write blog posts thinking through monetary policy issues in a formal way. Maybe that’s just the sad truth.
Yes indeed, isn’t it a shame that David Andolfatto’s and other mainstream economists’ models have to somehow relate to the real world? How much easier things would have been if only reality had the courtesy to mimic mainstream economists’ models …