Some Notes On Macro Modelling

             This postal service is prompted yesteryear this post yesteryear Robert Waldmann, in addition to this yesteryear Noah Smith, commenting on an before post by Wieland and Wolters. 

1) Forecasting in addition to policy analysis

Noah repeats what is a criterion line, which is that microfounded models are for policy analysis in addition to non forecasting, in addition to for forecasting “we don't necessitate the structural [microfounded] models, in addition to mightiness equally good toss them out”. The argue he gives is policy invariance: microfounded models address the Lucas critique.

While the Lucas critique is important, it is non inwards my sentiment the argue nosotros conduct maintain microfounded models. The necessitate for internal consistency drives the microfoundations project. Often internal consistency in addition to addressing the Lucas critique become together, but non always. The clearest representative is Woodford’s derivation of a quadratic social welfare business office from agents’ utility. This is non needed to address the Lucas critique, but it is required for an internally consistent analysis of what a benevolent policy maker should do.

Why is internal consistency important? Because nosotros intend that agents inwards the existent globe are internally consistent, in addition to then models that are non tin give the axe brand mistakes. They tin give the axe brand mistakes inwards forecasting equally good equally policy analysis.

However, inwards an endeavour to laissez passer on internal consistency, nosotros may good ignore of import features of the existent world. ‘Ad hoc’ models that capture these features may last meliorate models, in addition to give meliorate policy advice, fifty-fifty though they are potentially internally inconsistent.

So microfounded models could last meliorate at forecasting, in addition to ‘ad hoc’ models could give meliorate policy advice. In that feel I intend Noah is repeating a mutual misperception.

2) On a pedantic point, at that topographic point is a long tradition of comparison dissimilar macromodels, both for forecasting in addition to policy analysis, in addition to then Wieland and Wolters is hardly a outset step. In the Great Britain for xvi years nosotros had an fantabulous query centre that did simply that, run yesteryear Ken Wallis. There is a wealth of expertise there, which anyone doing this form of comparative analysis needs to tap.

3)  Just inwards instance anyone reading Robert’s postal service gets the incorrect impression, the thought of the core/periphery construction for the Bank of England’s model came from economists at the Bank (strongly influenced yesteryear the antecedents from other fundamental banks that I mentioned inwards my post), in addition to non me. My move was mainly to give advice on theoretical aspects of the model to a really competent squad who needed piddling of it. However Robert in addition to Noah are incorrect to advise that because the Bank uses the core/periphery construction for forecasting, at that topographic point is no quest inwards having the microfounded core. For example, you lot tin give the axe exercise policy analysis alongside both the consummate model in addition to simply the core.

4) This terminal comment is simply for those who read Robert’s post, in addition to is really pedantic. Robert starts off yesteryear maxim “As far equally I tin give the axe tell, Simon Wren-Lewis has been convinced yesteryear Paul Krugman”. The outset quest is that all my posts on this effect conduct maintain come upwardly from a consistent view. I intend microfoundations modelling is an of import affair to do, but I exercise non intend it is the solely valid means of modelling the economic scheme in addition to doing policy analysis. I intend Paul Krugman in addition to I are on absolutely the same page here, in addition to e'er conduct maintain been. Robert is soundless correct that my aim has been to convince those doing microfounded modelling of this point.

I’ve disagreed alongside Paul Krugman (and Robert) on the empirical success of the microfoundations approach, in addition to I soundless disagree. But given that nosotros concur that analysing microfounded models is useful, I don’t intend this is terribly important. I picked up on the ‘mistaking beauty for truth’ phrase, because – taken literally – I don’t intend that this is a problematic strength behind the means the microfoundations projection progresses. All scientists similar simplicity, in addition to they besides instruct complicated when they necessitate to, in addition to DSGE models exercise the same. What I intend is problematic is the weak move played yesteryear external consistency that I illustrated here, in addition to the move of ideology. On the latter I intend I’m i time over again on the same page equally Paul Krugman.