Microfounded Too Other Useful Models

                This championship harks dorsum to i of the books that possess got influenced me most: Blanchard too Fischer’s piece inwards 2009. His thought has been lately like Stephen Williamson, upset. I cry back at that spot are a lot of strands here, many of which are interesting.

The number I desire to beak over at nowadays is real specific. What is the run of the ‘useful models’ that Blanchard too Fischer beak over inwards chapter 10? Can Krugman’s claim that they tin terminate hold upward to a greater extent than useful than microfounded models ever hold upward true? I volition seek to suggest that it could be, fifty-fifty if nosotros possess got the suggestion (which I would not) that the microfoundations approach is the entirely valid means of doing macroeconomics. If you lot cry back this sounds similar a contradiction inwards terms, read on. The justification I advise for useful models is non the entirely (and may non hold upward the best) justification for them, but it is mayhap the i that is most easily seen from a microfoundations perspective.

First nosotros must detect a novel bespeak these ‘useful’ models. They are sometimes described equally ‘policy models’, but that is non a real skillful cry because microfounded models are also used to analyse policy. Let me telephone telephone them ‘aggregate models’. I cry back this term is useful, because the defining characteristic of the models I desire to beak virtually is that they start with aggregate macro relationships. Like an IS curve. Microfounded models get amongst microeconomics, similar an optimising representative consumer. I exercise non desire to telephone telephone aggregate models ‘ad hoc’, because the important of advertizing hoc is non good defined.

The typical construction of a microfounded model involves ii stages. In the showtime phase the microfoundations are fix out, private optimisation problems solved, too aggregation assumptions made. We fix out a exceptional world, mayhap a unique world, inwards all the exceptional required for the chore inwards hand. This showtime phase may also include deriving an aggregate welfare business office from private utility. This leads to a fix of aggregate relationships. The 2nd phase involves using these aggregate relationships inwards approximately means – to detect an optimum policy for example. In aggregate models nosotros entirely possess got the 2nd stage. H5N1 skillful newspaper of either type volition ofttimes become further, too endeavour to suggest (perhaps fifty-fifty show) what it is virtually the aggregate model that gives us the primal results of the paper. Let us telephone telephone this the critical features of the aggregate model.

Put this way, it looks equally if microfounded models must hold upward the superior tool – nosotros teach to a greater extent than data inwards the cast of the model’s microfoundations. In particular, nosotros flora that at to the lowest degree i microfounded back upward exists for the aggregate model nosotros usage inwards the 2nd stage. If nosotros get amongst an aggregate model, it is possible that no such microfounded back upward exists for that model. If that could hold upward proved, the usefulness of that aggregate model is completely diminished from a microfoundations perspective. H5N1 to a greater extent than realistic instance is if nosotros cannot for the 2nd detect whatsoever potential microfoundation for such an aggregate model (this is what approximately people hateful past times advertizing hoc), or the entirely microfoundation nosotros tin terminate detect is a fiddling odd. In that instance the usefulness of the aggregate model is highly questionable.

But suppose at that spot is inwards fact more than one valid microfoundation for a exceptional aggregate model. In other words, at that spot is non simply one, but mayhap a diversity of exceptional worlds which would atomic number 82 to this fix of aggregate macro relationships. (We could usage an analogy, too enjoin that these microfoundations were observationally equivalent inwards aggregate terms.) Furthermore, suppose that to a greater extent than than i of these exceptional worlds was a reasonable representation of reality. (Among this fix of worlds, nosotros cannot claim that i exceptional model represents the existent globe too the others exercise not.) It would seem to me that inwards this instance the aggregate model derived from these dissimilar worlds has approximately utility beyond simply i of these microfounded models. It is robust to option microfoundations.

                In these circumstances, it would seem sensible to become straightaway to the aggregate model, too ignore microfoundations. Well, non quite – it would hold upward skillful to possess got a judgement referring to the newspaper that shows at to the lowest degree i of these microfoundations. H5N1 classic illustration of what I possess got inwards heed hither is Clarida, Gali too Gertler (1999) Journal of Economic Literature. If an aggregate model tin terminate hold upward derived from a number of dissimilar microfoundations, too then nosotros truly appear to bound the generality of what nosotros are doing past times choosing i derivation too and then working amongst this exceptional microfounded model. I cry back this possibility is stronger notwithstanding if nosotros cry back virtually the critical features of an aggregate model – the things that generate the results nosotros focus on.

                I suspect it is this robustness aspect of aggregate models that makes them attractive to approximately macroeconomists. Why bound yourself to i exceptional microfoundation – too let’s hold upward honest, waste product fourth dimension going through yet approximately other derivation of Euler equations too the like? Why non become straightaway to the fix of aggregate relationships that comprise the critical features nosotros withdraw for the work at hand?

Now at that spot is a danger inwards this approach. That judgement referencing the newspaper where the aggregate model is derived from microfoundations may non hold upward written, too and then farther along the line of piece of work it turns out that the aggregate model beingness used misses out something of import because microfoundations were beingness ignored. Krugman acknowledges that danger inwards the final judgement of the quote I started with. However, it seems a fiddling strong to suggest that to avoid such mistakes nosotros should e'er exercise the total microfoundations thing.

                So my claim is inwards many ways quite a weak one. Some aggregate models comprise critical features that tin terminate hold upward derived from a number of dissimilar microfoundations. In that situation, it is natural to desire to piece of work amongst these aggregate models, too to depict them equally useful. We could fifty-fifty enjoin that they are to a greater extent than useful, because they possess got a generality that would hold upward missing if nosotros focused on i exceptional microfoundation.