Post-real macroeconomics

2 Jan, 2017 at 12:29 | Posted in Economics | 1 Comment

James Tobin explains why real business cycle theory and microfounded DSGE models are such a waste of time — thirty years before Paul Romer. Maybe one should start teaching some history of economic thought at economics departments again? Just a thought …

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.