Modeling the economy as a watch or as a cloud

Paul De Grauwe and Yuemei Ji

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 predic ons 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 condi onal forecasts.

Keywords: behavioural macroeconomics; supply shock; cloud model; watch model; heuristics (search for similar items in EconPapers)
JEL-codes: D84 D91 E17 E32 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2026-04-25
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Published in Italian Economic Journal, 25, April, 2026. ISSN: 2199-322X

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