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Macroeconomic modeling in the Anthropocene: why the E-DSGE framework is not fit for purpose and what to do about it

Author

Listed:
  • Yannis Dafermos

    (Department of Economics, SOAS University of London)

  • Andrew McConnel

    (Pollination Group)

  • Maria Nikolaidi

    (School of Accounting, Finance and Economics, University of Greenwich)

  • Servaas Storm

    (Delft University of Technology)

  • Boyan Yanovski

    (Dr. Roolfs Vent Solaire GmbH)

Abstract

Recent years have seen an increasing use of environmental dynamic stochastic general equilibrium (E-DSGE) models for analyzing the macroeconomic effects of the climate crisis. This paper explores to what extent these models are fit for purpose. We identify the limitations of the benchmark E-DSGE framework and explain how these limitations restrict the ability of this framework to meaningfully capture the macroeconomics of the climate crisis. We then explain how the assumptions behind these limitations can be relaxed, but argue that simply relaxing some of these assumptions in isolation is insufficient to address the problem. We therefore call for a broader use of other macroeconomic models, such as ecological stock-flow consistent (E-SFC) and ecological agent-based (E-AB) models, that address these limitations simultaneously. We explain how these models do not suffer from the pitfalls of the E-DSGE framework and outline how they need to improve to increase their usefulness as tools that can inform macroeconomic policy making in the Anthropocene.

Suggested Citation

  • Yannis Dafermos & Andrew McConnel & Maria Nikolaidi & Servaas Storm & Boyan Yanovski, 2024. "Macroeconomic modeling in the Anthropocene: why the E-DSGE framework is not fit for purpose and what to do about it," Working Papers Series inetwp229, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp229
    DOI: 10.36687/inetwp229
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    More about this item

    Keywords

    climate crisis; DSGE modeling; stock-flow consistent modeling; agent-based modeling; green macroeconomic policies; green finance;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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