Where Modern Macroeconomics Went Wrong

43 Pages Posted: 11 Sep 2017

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: September 2017

Abstract

This paper provides a critique of the DSGE models that have come to dominate macroeconomics during the past quarter-century. It argues that at the heart of the failure were the wrong microfoundations, which failed to incorporate key aspects of economic behavior, e.g. incorporating insights from information economics and behavioral economics. Inadequate modelling of the financial sector meant they were ill-suited for predicting or responding to a financial crisis; and a reliance on representative agent models meant they were ill-suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality. The paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them.

Suggested Citation

Stiglitz, Joseph E., Where Modern Macroeconomics Went Wrong (September 2017). NBER Working Paper No. w23795. Available at SSRN: https://ssrn.com/abstract=3035143

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