Cordon of Conformity: Why DSGE models Are Not the Future of Macroeconomics

25 Pages Posted: 1 Apr 2021

See all articles by Servaas Storm

Servaas Storm

Delft University of Technology - Department of Economics

Date Written: February 14, 2021

Abstract

The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis – to see how the fundamental pieces of the economy fit together, subject to it being ‘properly micro-founded’. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.

Keywords: New Keynesian DSGE models; rational expectations; micro-foundations; loanable funds model; Lucas critique; multiple equilibria; income distribution; demand-led growth; money and monetary production economy.

JEL Classification: E20; E60; F60; O10; O40.

Suggested Citation

Storm, Servaas, Cordon of Conformity: Why DSGE models Are Not the Future of Macroeconomics (February 14, 2021). Institute for New Economic Thinking Working Paper Series No. 148
https://doi.org/10.36687/inetwp148, Available at SSRN: https://ssrn.com/abstract=3812835

Servaas Storm (Contact Author)

Delft University of Technology - Department of Economics ( email )

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2628 EB Delft
Netherlands
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31-15-2783480 (Fax)

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