Implications for Regional Science of the “Rebuilding Macroeconomic Theory Projectâ€

Kieran P. Donaghy

International Regional Science Review, 2021, vol. 44, issue 3-4, 363-384

Abstract: The inability of macroeconomists to anticipate the Global Financial Crisis or reproduce it in their models has led to an important stock-taking of deficiencies in, and necessary modifications to, theories and models used pervasively by researchers and taught to graduate students. This stock-taking—the so-called “Rebuilding Macroeconomic Theory Project,†organized by David Vines and Samuel Wills—has provided an opportunity for economy-wide modelers (who include regional scientists) to consider whether the theories and models they employ are adequate and appropriate to the tasks to which they put them. In this paper I provide a brief report on the project, retrace the development of macroeconomics, and summarize responses by prominent macroeconomists to a set of questions posed by organizers of the project, while drawing implications of these questions and responses for regional science. I then offer original suggestions from a regional scientist’s perspective on what is missing from the “benchmark†macro-model, how financial frictions can be introduced, how behavioral foundations might be modified, how heterogeneity of agents might be captured, and what new stylized facts need to be explained. I proceed to illustrate how several of the suggested changes can be integrated in economy-wide models by drawing on a study of the impacts of monetary policy on consumption by different income groups in Indonesia. I close the paper by posing a number of “big-picture questions†on the implications of the RMTP for economy-wide modelers and regional scientists to ponder and by offering a brief reflection and aspiration.

Keywords: economic growth and development; policy and applications; poverty; income distribution; income inequality; social and political issues; policy and applications; macroeconomic theory; global financial crisis; economic and financial models; economic analysis; methods (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:sae:inrsre:v:44:y:2021:i:3-4:p:363-384

DOI: 10.1177/0160017620986590

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