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Internal consistency, price rigidity and the microfoundations of macroeconomics

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  • Simon Wren-Lewis

Abstract

Macromodels based on microfoundations represent the dominant approach in macroeconomics. These models appear to adopt a clear methodological approach, which promotes internal consistency above external consistency as a necessary condition of admissibility. This paper develops two arguments. The first is that internal consistency makes the development of microfounded macromodels dependent on the pace of theoretical innovation. This had led to an internal debate between 'pragmatists' who argue for limited departures from internal consistency, and 'purists' who claim that this would compromise methodological integrity. The second argument is directly relevant to this debate. It is that the inclusion of price rigidity into these models via short-cuts like Calvo contracts has required a key modification of the microfoundations methodology, such that internal consistency can only be claimed indirectly by appeal to theory developed elsewhere. This modification has repercussions that imply that the microfoundations project is not as unblemished as the 'purists' imagine.

Suggested Citation

  • Simon Wren-Lewis, 2011. "Internal consistency, price rigidity and the microfoundations of macroeconomics," Journal of Economic Methodology, Taylor & Francis Journals, vol. 18(2), pages 129-146.
    • Handle: RePEc:taf:jecmet:v:18:y:2011:i:2:p:129-146
    DOI: 10.1080/1350178X.2011.575950
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    Citations

    Blog mentions

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    1. 'The Day Macroeconomics Changed'
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      by Mainly Macro in Mainly Macro on 2014-04-02 22:20:00
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      by Mainly Macro in Mainly Macro on 2015-05-16 16:15:00
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      by Mainly Macro in Mainly Macro on 2017-08-25 13:20:00

    Citations

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    Cited by:

    1. Jakob Palek, 2015. "The Optimal Monetary and Fiscal Policy Mix in a Financially Heterogeneous Monetary Union," MAGKS Papers on Economics 201506, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Palek, Jakob, 2015. "The Optimal Monetary and Fiscal Policy Mix in a Financially Heterogeneous Monetary Union," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113047, Verein für Socialpolitik / German Economic Association.
    3. Jaakko Kuorikoski & Aki Lehtinen, 2018. "Model selection in macroeconomics: DSGE and ad hocness," Journal of Economic Methodology, Taylor & Francis Journals, vol. 25(3), pages 252-264, July.
    4. Palek, Jakob & Schwanebeck, Benjamin, 2019. "Optimal monetary and macroprudential policy in a currency union," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 167-186.
    5. Jochen Michaelis & Jakob Palek, 2014. "Optimal Monetary Policy in a Currency Union: Implications of a Country-specific Cost Channel," MAGKS Papers on Economics 201444, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Orland, Andreas & Roos, Michael W.M., 2013. "The New Keynesian Phillips curve with myopic agents," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2270-2286.
    7. J. E. King, 2012. "Post Keynesians and Others," Review of Political Economy, Taylor & Francis Journals, vol. 24(2), pages 305-319, April.
    8. Palek, Jakob & Schwanebeck, Benjamin, 2017. "Financial frictions and optimal stabilization policy in a monetary union," Economic Modelling, Elsevier, vol. 61(C), pages 462-477.
    9. Sheila C. Dow, 2014. "Consistency in pluralism and microfoundations," Working Papers PKWP1408, Post Keynesian Economics Society (PKES).

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    Keywords

    internal consistency; microfoundations;

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