Macroeconomic modeling in the Anthropocene: why the E-DSGE framework is not fit for purpose and what to do about it

Yannis Dafermos, Andrew McConnel, Maria Nikolaidi, Servaas Storm () and Boyan Yanovski
Additional contact information
Yannis Dafermos: Department of Economics, SOAS University of London
Andrew McConnel: Pollination Group
Maria Nikolaidi: School of Accounting, Finance and Economics, University of Greenwich
Servaas Storm: Delft University of Technology
Boyan Yanovski: Dr. Roolfs Vent Solaire GmbH

No inetwp229, Working Papers Series from Institute for New Economic Thinking

Abstract: Recent years have seen an increasing use of environmental dynamic stochastic general equilibrium (E-DSGE) models for analyzing the macroeconomic effects of the climate crisis. This paper explores to what extent these models are fit for purpose. We identify the limitations of the benchmark E-DSGE framework and explain how these limitations restrict the ability of this framework to meaningfully capture the macroeconomics of the climate crisis. We then explain how the assumptions behind these limitations can be relaxed, but argue that simply relaxing some of these assumptions in isolation is insufficient to address the problem. We therefore call for a broader use of other macroeconomic models, such as ecological stock-flow consistent (E-SFC) and ecological agent-based (E-AB) models, that address these limitations simultaneously. We explain how these models do not suffer from the pitfalls of the E-DSGE framework and outline how they need to improve to increase their usefulness as tools that can inform macroeconomic policy making in the Anthropocene.

Keywords: climate crisis; DSGE modeling; stock-flow consistent modeling; agent-based modeling; green macroeconomic policies; green finance (search for similar items in EconPapers)
JEL-codes: E10 E20 E40 E50 E60 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2024-10-12
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp229

DOI: 10.36687/inetwp229

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