Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome

23 Pages Posted: 27 Sep 2010 Last revised: 10 Oct 2010

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: September 27, 2010

Abstract

In this paper I argue that the current core of macroeconomics - by which I mainly mean the so-called dynamic stochastic general equilibrium approach - has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in “fine-tuning” mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in “broad-exploration” mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.

Keywords: Pretense of knowledge, DSGE, core and periphery of macroeconomics, financial crisis, complexity, robust control, uncertainty, rational expectations

JEL Classification: A1, B4, E1, G01

Suggested Citation

Caballero, Ricardo J., Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome (September 27, 2010). MIT Department of Economics Working Paper No. 10-16. Available at SSRN: https://ssrn.com/abstract=1683617 or http://dx.doi.org/10.2139/ssrn.1683617

Ricardo J. Caballero (Contact Author)

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