Where Modern Macroeconomics Went Wrong

By Joseph E. Stiglitz. 2017

292 citations recorded by the source corpus.

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.

View Paper: https://www.semanticscholar.org/paper/416b36fd50d6af288241614b4a4f237c85ad5051

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

Citations in the corpus

Behavioral & Experimental Macroeconomics and Policy Analysis: A Complex Systems Approach (2018, background): “Stiglitz (2018) is particularly critical of DSGE models; Christiano et al. (2017) provide a detailed reply defending the DSGE approach.”
Low‐carbon transition risks for finance (2020, background): “Moreover, integrating a meaningful financial sector into these models would require major changes to the theoretical framework (Stiglitz, 2018).”
Economic Forecasting with an Agent-Based Model (2020, background): “For earlier ritiques, see, e.g. Canova and Sala (2009), Colander et al. (2009), Kirman (2010), Edge and Gurkaynak (2010), Krugman (2011), Stiglitz (2011, 2018), Blanchard 2016), and Romer (2016).”
The rebuilding macroeconomic theory project: an analytical assessment (2018, background): “Randall Wright argues that DSGE models were never suited to the task of studying large crises.32 Joseph Stiglitz (2018) argues that these models have been good at what they are designed to do: explaining the behaviour of the macroeconomy during ‘normal times’ like the Great Moderation, and that the ”