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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 behavior, e.g. incorporating insights from information economics and behavioral 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, 2017. "Where Modern Macroeconomics Went Wrong," NBER Working Papers 23795, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23795
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    References listed on IDEAS

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    1. repec:oup:oxford:v:34:y:2018:i:1-2:p:269-286. is not listed on IDEAS
    2. Dimitri Kroujiline & Maxim Gusev & Dmitry Ushanov & Sergey V. Sharov & Boris Govorkov, 2018. "An Endogenous Mechanism of Business Cycles," Papers 1803.05002, arXiv.org, revised Apr 2018.

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    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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