Macro Needs Micro

Abstract

An emerging consensus on the future of macroeconomics views the incorporation of a role for financial intermediation, labor market frictions, and household heterogeneity in the presence of uninsurable unemployment risk as key needed extensions to the benchmark macro framework. I argue that this is welcome, but not sufficient for macro - and international macro - to tackle the menu of issues that have been facing policymakers since the recent global crisis. For this purpose, macro needs more micro than the benchmark setup has been incorporating so far. Specifically, artificial separations between business cycle analysis, the study of stabilization policies, and growth macro, as well as between international macroeconomics and international trade, must be overcome. I review selected literature contributions that took steps in this direction; outline a number of important, promising directions for future research; and discuss methodological issues in the development of this agenda.

Keywords: DSGE; Heterogeneous firms; Macroeconomic policy; Market entry and exit; Monopoly power; Producer dynamics; Reallocation; Structural reforms; Trade

JEL Classification: E10, E32, E52, F12, F23, F40