Tag Archives: DSGE

The Macro Battle Continues

Willem Buiter of LSE is writing for the Financial Times. His latest post is a “takedown” of modern macroeconomics. David Andolfatto critiques modern New Keynesian (NK) models and then unloads on Buiter:

My beef with the NK paradigm is this in a nutshell. It is a model that ignores money and typically, financial markets too. It embeds unexplained “frictions,” like sticky prices. It embeds conceptually vacuous “shocks” like “mark-up shocks” or “inflation shocks.” It focusses on the policy problem of “stabilizing” the economy in the face of these little itty-bitty shocks. It is not a model designed to understand financial crisis. It is a model designed to legitimize what central bankers always believed they should be doing in the first place: adjust the short-term interest rate to stablize the economy around a predetermined long-run trend. This is why the NK model is the dominant paradigm; and this is why those that promote this view land all the cushy consulting jobs. Among those that promote this view include our very own Herr Buiter. Here are some links to the courses he teaches on the subjects: see here. Good job, Willem. One can easily see how your students (and yourself) were well-prepared to deal with the current financial market crisis with your “very useful ad hoc models” of the economy.

Will Ambrosini gets into the foray as well:

Google scholar and a minimal knowledge of the DSGE literature allows one to refute Buiter’s claims in less than 10 minutes. Someone should really give him a quick lesson on Google scholar.

Modern Macro

I echoed Will Ambrosini’s call for critics of modern macro to survey the literature. Here are a couple papers (non-gated) that provide an overview:

I would actually recommend the debut issue of the American Economic Journal: Macroeconomics (which features the Woodford piece above) for a brief look at the goings on in modern macro as well.