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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.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/1350178X.2011.575950
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Economic Methodology.

Volume (Year): 18 (2011)
Issue (Month): 2 ()
Pages: 129-146

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Handle: RePEc:taf:jecmet:v:18:y:2011:i:2:p:129-146

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Related research

Keywords: internal consistency; microfoundations;

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Judgement Calls and Microfoundation Tricks
    by Mainly Macro in Mainly Macro on 2012-09-09 11:00:00
  2. New Keynesian models and the labour market
    by Mainly Macro in Mainly Macro on 2013-08-23 13:30:00
  3. Microfoundations and Macro Wars
    by Mainly Macro in Mainly Macro on 2013-10-15 23:12:00
  4. More on the illusion of superiority
    by Mainly Macro in Mainly Macro on 2013-12-19 15:35:00
  5. Microfoundations and the Phillips curve
    by Mainly Macro in Mainly Macro on 2014-04-02 17:20:00
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Cited by:
  1. J. E. King, 2012. "Post Keynesians and Others," Review of Political Economy, Taylor & Francis Journals, vol. 24(2), pages 305-319, April.
  2. Andreas Orland & Michael W.M. Roos, 2011. "The New Keynesian Phillips Curve with Myopic Agents," Ruhr Economic Papers 0281, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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