Rethinking macroeconomic theory24 September, 2016 at 19:07 | Posted in Economics | Leave a comment
Several mainstream economists still believe that ‘any interesting model must be a dynamic stochastic general equilibrium model. From this perspective, there is no other game in town. If you have an interesting and coherent story to tell, you can tell it in a DSGE model. If you cannot, your story is incoherent’ (V.V. Chair). Similarly, not very long ago, Blanchard (2014, p. 31) was affirming that the solution to previous mistakes was that ‘DSGE models should be expanded to better recognize the role of the financial system.’ It is hard to see how conceiving of the financial system as frictions to the real economy can help in understanding macroeconomics. Simon Wren-Lewis (2016, p. 33) is adamant that the methodology proposed by what he calls the New Classical Counter Revolution, enclosed into DSGE and New Keynesian models, is a worthy one, and that as a consequence ‘the microfoundations methodology is entrenched … so it is unlikely that its practitioners will down tools and start afresh’. Wren-Lewis further claims says that ‘the methodology is progressive’, and like Blanchard he believes that ‘researchers are devoting a good deal of time to examining real/financial interactions’ (2016, p. 30), so that all is well as long as Keynesian results are not excluded by assumption and can be recovered from the simulations.