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Rethinking the micro-foundations of macroeconomics: insights from behavioural economics

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  • Michelle Baddeley

    (UCL, UK)

Abstract

In the aftermath of the financial crisis, macroeconomics is at a crossroads: on the one hand, the analytically rigorous, assumption-based approaches based on dynamic stochastic general equilibrium (DSGE) models lack intuitive plausibility and predictive power; on the other hand, alternative models lack an underlying analytical core. Behavioural economics offers a potential solution if it can unify intuition and analytical rigour. The aim of this paper is to assess the extent to which macroeconomics can embed behavioural and psychological insights from behavioural microeconomic analysis in order to build a rigorous and intuitively plausible understanding of how economic systems, including the macroeconomy and the financial system, work.

Suggested Citation

  • Michelle Baddeley, 2014. "Rethinking the micro-foundations of macroeconomics: insights from behavioural economics," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 99-112, April.
  • Handle: RePEc:elg:ejeepi:v:11:y:2014:i:1:p99-112
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    References listed on IDEAS

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    More about this item

    Keywords

    macroeconomics; micro-foundations; behavioural economics; animal spirits;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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