Have Macroeconomic Models Lost Their Connection with Economic Reality?

25 Pages Posted: 6 May 2020

See all articles by Tom van Veen

Tom van Veen

Maastricht University - School of Business and Economics

Date Written: 2020

Abstract

Macroeconomic theory has developed into increasingly sophisticated mathematical models. In the words of Mankiw, macroeconomics has developed from engineering into science. The Global Financial Crisis (GFC) revealed that the empirical relevance and the usefulness of these models is debatable. Why has this occurred? Who have been the key players in this development? What have been the policy implications of this development? This paper addresses these points by providing an overview of the development of macroeconomic theory over the past 40 years. The focus is on the main lines of thinking and the story behind the models more so than on the mathematical details of these models. I argue that crises have been the main driver of changes in macroeconomic theory and that the current debates after the GFC will be the start of a more plural approach to macroeconomics, in which engineers will regain their place.

Keywords: macroeconomic theory, Keynes, Friedman, Lucas

JEL Classification: B220, E120, E600

Suggested Citation

van Veen, Tom, Have Macroeconomic Models Lost Their Connection with Economic Reality? (2020). CESifo Working Paper No. 8256, Available at SSRN: https://ssrn.com/abstract=3594005 or http://dx.doi.org/10.2139/ssrn.3594005

Tom Van Veen (Contact Author)

Maastricht University - School of Business and Economics ( email )

Netherlands

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