Where modern macroeconomics went wrong

Joseph Stiglitz

Oxford Review of Economic Policy, 2018, vol. 34, issue 1-2, 70-106

Abstract: This paper provides a critique of the DSGE models that have come to dominate macroeconomics during the past quarter-century. It argues that at the heart of the failure were the wrong microfoundations, which failed to incorporate key aspects of economic behaviour, e.g. incorporating insights from information economics and behavioural economics. Inadequate modelling of the financial sector meant they were ill-suited for predicting or responding to a financial crisis; and a reliance on representative agent models meant they were ill-suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality. The paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them.

Keywords: DSGE; representative agent; deep downturns; economic fluctuations (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (121)

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Working Paper: Where Modern Macroeconomics Went Wrong (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:oxford:v:34:y:2018:i:1-2:p:70-106.

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