Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome

By Ricardo J. Caballero. 2010

429 citations recorded by the source corpus.

In this paper I argue that the current core of macroeconomics--by which I mainly mean the so-called dynamic stochastic general equilibrium approach--has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in "fine-tuning" mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in "broad-exploration" mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/efe07e7072b036ff7d82a2f295c0e7211261124d

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In Economics and Econometrics

Citations in the corpus

Tipping Points in Macroeconomic Agent-Based Models (2013, background): “Kirman, The Economic Crisis is a Crisis for Economic Theory, CESifo Economic Studies, 56: 498-535 (2010) [10] R.”
Incentives to Innovate and Financial Crises (2012, neutral): “Caballero (2010) provides an interesting discussion of the various factors at work in generating crises.”
Estimation of ergodic agent-based models by simulated minimum distance (2015, background): “…trend in AB macro modeling towards more detailed and richer models, targeting at a higher number of stylized macro facts, and claiming a stronger empirical content.4 These models directly attempt at replacing the DSGE approach at the core of macroeconomics (Caballero, 2010) with an AB counterpart.”
A Network Analysis of Global Banking:1978-2009 (2011, positive): “In the wake of the recent crisis it has been argued that network theories can enrich our understanding of the functioning of financial systems by helping model complexity, systemic risk, and the factors that cause seizures in financial markets (Haldane, 2009; Caballero, 2010).”
More is different ... and complex! the case for agent-based macroeconomics (2019, neutral): “(Caballero, 2010, offers a thorough picture of this surreal state of affairs).”