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Modeling the economy as a watch or as a cloud

Author

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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, 2026. "Modeling the economy as a watch or as a cloud," LSE Research Online Documents on Economics 137712, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:137712
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    File URL: https://researchonline.lse.ac.uk/id/eprint/137712/
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    Keywords

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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