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Where modern macroeconomics went wrong

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  • Joseph E Stiglitz

Abstract

This paper provides a critique of the DSGE models that have come to dominate macroeconomics during the past quarter-century. It argues that at the heart of the failure were the wrong microfoundations, which failed to incorporate key aspects of economic behaviour, e.g. incorporating insights from information economics and behavioural economics. Inadequate modelling of the financial sector meant they were ill-suited for predicting or responding to a financial crisis; and a reliance on representative agent models meant they were ill-suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality. The paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them.

Suggested Citation

  • Joseph E Stiglitz, 2018. "Where modern macroeconomics went wrong," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 70-106.
  • Handle: RePEc:oup:oxford:v:34:y:2018:i:1-2:p:70-106.
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    Keywords

    DSGE; representative agent; deep downturns; economic fluctuations;

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
    • E0 - Macroeconomics and Monetary Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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