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Have Macroeconomic Models Lost Their Connection with Economic Reality?

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  • Tom van Veen

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.

Suggested Citation

  • Tom van Veen, 2020. "Have Macroeconomic Models Lost Their Connection with Economic Reality?," CESifo Working Paper Series 8256, CESifo.
    • Handle: RePEc:ces:ceswps:_8256
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8256.pdf
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    More about this item

    Keywords

    macroeconomic theory; Keynes; Friedman; Lucas;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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