Modeling the Economy as a Watch or as a Cloud. How do these Models Predict the Effects of Supply Shocks?

Paul De Grauwe and Yuemei Ji

No 19685, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We argue that the mainstream macroeconomic models (DSGE-models) are models that operate like “watches†, while behavioural macroeconomic models operate like “clouds†. We define what this means. We contrast the predictions these two simple canonical macroeconomic models make about the transmission of supply shocks. We find that in the cloud model the fog surrounding the transmission of these shocks is much denser than in the watch model, making it difficult to make conditional forecasts.

Keywords: Behavioural; macroeconomics (search for similar items in EconPapers)
JEL-codes: E32 E37 E70 (search for similar items in EconPapers)
Date: 2024-11
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