Toward a new microfounded macroeconomics in the wake of the crisis

Eugenio Caverzasi and Alberto Russo

No PKWP1807, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: The Great Recession that followed the financial crisis of 2007 is not only the largest economic crisis after the Great Depression of the 1930s, it also signals a crisis of economics as a discipline. This is not only the consequence of the inadequacy of mainstream macroeconomics, and specifically the DSGE workhorse model, to forecast such a huge event, or at least to detect the worrying tendencies towards it. Even more relevant is the choice to explicitly avoid the modelling of large crises (that for someone is a motivation for not attacking pre-crisis DSGE models focused on the analysis of small deviations from the steady-state), so denying the intrinsic nature of capitalism, a system that necessarily proceeds through cycles and (extended) crises. The replies of the DSGE approach to critics have led to extensions regarding for instance the role of financial frictions, heterogeneous agents, and bounded rationality (though typically in the form of quasi-rational expectations). The alternative paradigm of Agent-Based Macroeconomics can take into account all these elements at once within an evolutionary modelling framework based on heterogeneity and interaction, so capable to endogenously reproduce complex dynamics, from small fluctuations to large crises, due to innovation and industrial dynamics, rising inequality and financial instability, and so on. The integration between Agent-Based Macroeconomics and the (post-Keynesian) Stock-Flow Consistent approach represents a promising way for the future development of this research field.

Keywords: Agent-Based macro modelling; Stock-Flow-Consistent modelling; microfoundation; heterodox economics (search for similar items in EconPapers)
JEL-codes: B16 B40 B50 C60 E12 E44 (search for similar items in EconPapers)
Pages: 30
Date: 2018-08
New Economics Papers: this item is included in nep-bec, nep-knm, nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Toward a new microfounded macroeconomics in the wake of the crisis (2018)
Working Paper: Toward a New Microfounded Macroeconomics in the Wake of the Crisis (2018)
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