Do Non Underestimate The Ability Of Microfoundations

Mainly for economists

Brad DeLong asked the same question, but I suspect from a dissimilar perspective!) Brad says his inquiry is closely related to the “question of why models that are microfounded inwards ways nosotros know to endure incorrect are preferable inwards the discourse to models that stimulate to larn the aggregate emergent properties right.”

I would estimate the 2 questions are inwards fact precisely the same. The NK model is the microfounded way of doing Keynesian economics, as well as microfounded (DSGE) models are de rigueur inwards academic macro, so whatever mainstream academic wanting to analyse work concern wheel issues from a Keynesian perspective volition role a variant of the NK model. Why are microfounded models as well as hence dominant? From my perspective this is a methodological question, close the relative importance of ‘internal’ (theoretical) versus ‘external’ (empirical) consistency.

As macro 50 years agone was very different, it is an interesting methodological inquiry to enquire why things changed, fifty-fifty if y'all shout out back the alter has greatly improved how macro is done (as I do). I would argue that the New Classical (counter) revolution was essentially a methodological revolution. However at that spot are 2 problems alongside having such a discussion. First, economists are commonly not comfortable talking close methodology. Second, it volition endure a fighting to larn macroeconomists below a sure as shooting historic catamenia to acknowledge this is a methodological issue. Instead they persuasion microfoundations every bit just putting right inadequacies alongside what went before.

So, for example, y'all volition endure told that internal consistency is clearly an essential characteristic of whatever model, fifty-fifty if it is achieved past times abandoning external consistency. You volition take away heed how the Lucas critique proved that whatever non-microfounded model is inadequate for doing policy analysis, rather than it just existence i expression of a complex trade-off betwixt internal as well as external consistency. In essence, many macroeconomists today are blind to the fact that adopting microfoundations is a methodological choice, rather than just a agency of correcting the errors of the past.

I shout out back this has 2 implications for those who desire to inquiry the microfoundations hegemony. The get-go is that the give-and-take needs to endure close methodology, rather than private models. Deficiencies alongside item microfounded models, similar the NK model, are to a greater extent than oftentimes than non good understood, as well as from a microfoundations indicate of persuasion just render an agenda for to a greater extent than research. Second, lack of familiarity alongside methodology agency that this give-and-take cannot presume noesis that is non there. (And contestation that it should endure at that spot is a relevant indicate for economic science teaching, but is pointless if y'all are trying to alter electrical flow discourse.) That makes give-and-take difficult, but I’m non sure as shooting it makes it impossible.