Cordon of Conformity:Why DSGE models Are Not the Future of Macroeconomics

Servaas Storm ()
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Servaas Storm: Delft University of Technology

No inetwp148, Working Papers Series from Institute for New Economic Thinking

Abstract: The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis to see how the fundamental pieces of the economy fit together, subject to it being 'properly micro-founded'. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.

Keywords: New Keynesian DSGE models; rational expectations; micro-foundations; loanable funds model; Lucas critique; multiple equilibria; income distribution; demand-led growth; money and monetary production economy. (search for similar items in EconPapers)
JEL-codes: E20 E60 F60 O10 O40 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2021-02-14
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-hpe and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp148

DOI: 10.36687/inetwp148

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