Microfoundations – Is At That Topographic Point An Alternative?

                In previous posts I possess got given 2 arguments for looking at aggregate macroeconomic models without explicitly specifying their microfoundations. (I afterwards got distracted into defending microfoundations against attacks that I thought went likewise far – equally I said here, I produce non mean value seeing this equally a 2 sided debate is helpful.) In this post I desire to examine a much to a greater extent than radical, together with withal one-time fashioned idea, which is that aggregate models could purpose relationships which are justified empirically rather than through microfoundations.  This declaration volition mirror similar points made inward an fantabulous post past times Richard Serlin inward the context of finance. Richard also reflected on my before posts here. For an real proficient summary together with commentary on recent posts on this number first was that an aggregate model mightiness possess got a number of microfoundations, together with hence all that was required was a reference to at to the lowest degree 1 of those. Thanks to comments, I at 1 time know that a similar betoken was was non impressed, I mean value because he felt yous should hold upwardly able to figure out which microfoundation represents reality. Unfortunately I mean value reality is frequently likewise complex to hold upwardly good represented past times merely 1 microfoundation – mean value of the many proficient reasons for cost rigidity, for example. In these circumstances robustness is important.)

                The second is to a greater extent than controversial. Because microfoundations takes time, an aggregate human relationship may non equally withal possess got a clear microfoundation, but it mightiness inward the future. If at that spot is potent empirical evidence for it now, academic inquiry should investigate its implications. So, for example, at that spot is roughly evidence for ‘inflation inertia’: the presence of lagged equally good equally expected inflation inward a Phillips curve. The theoretical reasons (microfoundation) for this are non that clear, but it is both of import together with interesting to investigate what the macroeconomic consequences of inflation inertia mightiness be.

                This minute declaration could justify a real express difference from microfoundations. Influenza A virus subtype H5N1 macro model mightiness hold upwardly only microfounded except for this 1 ‘ad hoc’ element. I tin strength out mean value of a few papers inward proficient journals that accept this approach. I possess got also heard macroeconomists object to papers of this kind: to quote 1 ‘microfoundations must hold upwardly respected’. It was reflecting on this that led me to purpose the term ‘microfoundations purist’.

Suppose nosotros deny the microfoundations purist position, together with concord that it is a valid to explore promotion hoc relationships inside the context of an otherwise microfounded model. By valid, I hateful that these papers should non automatically hold upwardly disqualified from appearing inward the tiptop journals. If nosotros accept this position, hence at that spot seems to hold upwardly no ground inward regulation why departures from microfoundations of this type should hold upwardly hence limited. Why non justify a large number of aggregate relationships using empirical evidence rather than microfoundations?

                This used to hold upwardly done dorsum inward my youth. An aggregate model would hold upwardly postulated human relationship past times relationship, together with each equation would hold upwardly justified past times reference to both empirical together with theoretical evidence inward the literature. Let us telephone band this an empirically based aggregate model. You produce non discovery macroeconomic papers similar this inward the amend journals nowadays. Even if papers similar this were submitted, I suspect they would hold upwardly rejected. Why has this vogue of macro analysis died out?

                I desire to propose 2 reasons, without implying that either is a sufficient justification. The starting fourth dimension is that such models cannot claim to hold upwardly internally consistent. Even if each aggregate human relationship tin strength out hold upwardly industrial plant life inward roughly theoretical newspaper inward the literature, nosotros possess got no ground to believe that these theoretical justifications are consistent alongside each other. The only means of ensuring consistency is to produce the theory inside the newspaper – equally a microfounded model does. Influenza A virus subtype H5N1 minute ground this vogue of modelling has disappeared is a loss of organized religious belief inward fourth dimension serial econometrics. Sims (1980) argued that touchstone identification restrictions were ‘incredible’, together with introduced us to the VAR. (For an before endeavor of mine to apply a similar declaration to the demise of what used to hold upwardly called Structural Econometric Models, run across here.)

                In roughly ways I mean value this minute assault was to a greater extent than damaging, because it undercut the obvious methodological defence strength of empirically based aggregate models. It is tempting to link microfounded models together with empirically based aggregate models alongside 2 methodological approaches: a deductivist approach that Hausmann ascribes to microeconomics, together with a to a greater extent than inductive approach that Marc Blaug has advocated. Those familiar alongside these damage tin strength out skip the adjacent 2 paragraphs.

                Microeconomics is built upwardly inward a deductive means from a small-scale number of basic axioms of human behaviour. How these axioms are validated is controversial, equally are the implications when they are rejected. Many economists human activity equally if they are self evident. We build upwardly theory past times adding sure enough primitives to these axioms (e.g. inward trade, that at that spot be carry costs), together with exploring their consequences. This trunk of theory volition explicate many features of the world, but non all. Those it does non explicate are defined equally puzzles. Puzzles are challenges for hereafter theoretical work, but they are rarely plenty to spend upwardly the existing trunk of theory. Under this methodology, the internal consistency of the model is all important.

                An inductivist methodology is mostly associated alongside Karl Popper. Here incompatibility alongside empirical evidence is fatal for a theory. Evidence tin strength out never seek a theory to hold upwardly truthful (the ‘problem of induction’), but it tin strength out disprove it. Seeing 1 dark swan disproves the theory that all swans are white, but seeing many white swans does goose egg to seek the theory. This methodology was of import inward influencing the LSE econometric school, associated especially alongside David Hendry. (Adrian Pagan has a prissy comparative account.) Here evidence, which nosotros tin strength out telephone band external consistency, is all important.

I mean value the deductivist methodology fits for microfounded models. Internal consistency is the venture stone on which microfounded macromodels stand. That does non of course of written report larn into immune from criticism, but its practitioners know where they stand. There are clear rules past times which their activities tin strength out hold upwardly judged. To purpose a term due I mean value to Lakatos, the microfoundations inquiry programme has a good defined positive heuristic. Microfoundations researchers know what they are doing, together with it does convey positive results.

The problem alongside applying an inductivist methodology to empirically based aggregate macromodels is that the stone of external consistency looks to a greater extent than similar sand. Evidence inward macroeconomics is hardly always of the dark swan type, where 1 observation/regression is plenty to disprove a theory. Philosophers of scientific discipline possess got queried the validity of the Popperian ideal fifty-fifty inward the context of the physical sciences, together with these difficulties locomote much to a greater extent than acuate inward something equally messy equally macro.

So I cease alongside a whole educate of questions. Is it possible to build a clear methodology for empirically based aggregate models inward macro? If not, does this matter? If at that spot is no right methodology (we cannot possess got both consummate internal together with external consistency at the same time), should proficient models inward fact hold upwardly eclectic from a methodological betoken of view? Does the methodological clarity of microfounded macro aid explicate its full potency inward academia today, or are at that spot other explanations? If this potency is non healthy, how does it change?