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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

    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 16:00:00
    2. New Keynesian models and the labour market
      by Mainly Macro in Mainly Macro on 2013-08-23 18:30:00
    3. Microfoundations and Macro Wars
      by Mainly Macro in Mainly Macro on 2013-10-16 04:12:00
    4. More on the illusion of superiority
      by Mainly Macro in Mainly Macro on 2013-12-19 21:35:00
    5. Microfoundations and the Phillips curve
      by Mainly Macro in Mainly Macro on 2014-04-02 22:20:00
    6. Economists and methodology
      by Mainly Macro in Mainly Macro on 2014-05-09 18:36:00
    7. Paul Romer and microfoundations
      by Mainly Macro in Mainly Macro on 2015-05-16 16:15:00
    8. The day macroeconomics changed
      by Mainly Macro in Mainly Macro on 2015-08-27 15:58:00
    9. 'The Day Macroeconomics Changed'
      by Mark Thoma in Economist's View on 2015-08-27 14:23:47
    10. Medicine and the microfoundations hegemony in macroeconomics
      by Mainly Macro in Mainly Macro on 2017-08-25 13:20:00

    Citations

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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. 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).
    3. Palek, Jakob, 2015. "The Optimal Monetary and Fiscal Policy Mix in a Financially Heterogeneous Monetary Union," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113047, Verein für Socialpolitik / German Economic Association.
    4. Palek, Jakob & Schwanebeck, Benjamin, 2017. "Financial frictions and optimal stabilization policy in a monetary union," Economic Modelling, Elsevier, vol. 61(C), pages 462-477.
    5. Jakob Palek & Benjamin Schwanebeck, 2015. "Optimal Monetary and Macroprudential Policy in a Currency Union," MAGKS Papers on Economics 201522, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Sheila C. Dow, 2014. "Consistency in pluralism and microfoundations," Working Papers PKWP1408, Post Keynesian Economics Society (PKES).
    7. 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.
    8. 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).

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    Keywords

    internal consistency; microfoundations;

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