Where Modern Macroeconomics Went Wrong

Joseph Stiglitz

No 23795, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper provides a critique of the DSGE models that have come to dominate macroeconomics during the past quarter-century. It argues that at the heart of the failure were the wrong microfoundations, which failed to incorporate key aspects of economic behavior, e.g. incorporating insights from information economics and behavioral economics. Inadequate modelling of the financial sector meant they were ill-suited for predicting or responding to a financial crisis; and a reliance on representative agent models meant they were ill-suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality. The paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them.

JEL-codes: A1 A2 E0 E1 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-dge, nep-his, nep-hme, nep-hpe, nep-mac and nep-pke
Note: IFM ME
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Citations: View citations in EconPapers (26)

Forthcoming in the Oxford Review of Economic Policy on Rebuilding Macroeconomic Theory; Vol. 34, No. 1, Spring and Summer 2018.

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Journal Article: Where modern macroeconomics went wrong (2018)
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