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Modeling the Economy as a Watch or as a Cloud. How do these Models Predict the Effects of Supply Shocks?

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  • De Grauwe, Paul
  • Ji, Yuemei

Abstract

We argue that the mainstream macroeconomic models (DSGE-models) are models that operate like “watches†, while behavioural macroeconomic models operate like “clouds†. We define what this means. We contrast the predictions these two simple canonical macroeconomic models make about the transmission of supply shocks. We find that in the cloud model the fog surrounding the transmission of these shocks is much denser than in the watch model, making it difficult to make conditional forecasts.

Suggested Citation

  • De Grauwe, Paul & Ji, Yuemei, 2024. "Modeling the Economy as a Watch or as a Cloud. How do these Models Predict the Effects of Supply Shocks?," CEPR Discussion Papers 19685, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19685
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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