The Cournot Centre series
Edited by Robert M. Solow and Jean-Philippe Touffut
Chapter 2: Model comparison and robustness: a proposal for policy analysis after the financial crisis
In the aftermath of the financial crisis, the state of macroeconomic modelling and the use of macroeconomic models in policy analysis have come under heavy criticism. Media and other commentators have criticized macroeconomists for failing to predict the Great Recession of 2008–09, or at least for failing to provide adequate warning of the risk of such a recession. Practitioners have attributed this failure to academic and central bank researchers’ love of a particular modelling paradigm. They blame so-called dynamic stochastic general equilibrium (DSGE) models for misdirecting the attention of policy makers. Indeed, even some wellknown academics-cum-bloggers have published scathing commentaries on the current state of macroeconomic modelling. On 3 March 2009, Willem Buiter wrote on the Financial Times blog, ‘the typical graduate macroeconomics and monetary economics training received at Anglo- American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding’. This view was echoed by Nobel Laureate Paul Krugman on 11 June 2009 in the weekly Economist, ‘Most work in macroeconomics in the past 30 years has been useless at best and harmful at worst’.
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