Rethinking the micro-foundations of macroeconomics: insights from behavioural economics

Michelle Baddeley

European Journal of Economics and Economic Policies: Intervention, 2014, vol. 11, issue 1, 99-112

Abstract: In the aftermath of the financial crisis, macroeconomics is at a crossroads: on the one hand, the analytically rigorous, assumption-based approaches based on dynamic stochastic general equilibrium (DSGE) models lack intuitive plausibility and predictive power; on the other hand, alternative models lack an underlying analytical core. Behavioural economics offers a potential solution if it can unify intuition and analytical rigour. The aim of this paper is to assess the extent to which macroeconomics can embed behavioural and psychological insights from behavioural microeconomic analysis in order to build a rigorous and intuitively plausible understanding of how economic systems, including the macroeconomy and the financial system, work.

Keywords: macroeconomics; micro-foundations; behavioural economics; animal spirits (search for similar items in EconPapers)
JEL-codes: E00 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:elg:ejeepi:v:11:y:2014:i:1:p99-112

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