Olivier Blanchard recently wrote that there ought to be two classes of macroeconomic models.
Theory models, aimed at clarifying theoretical issues within a general equilibrium setting. Models in this class should build on a core analytical frame and have a tight theoretical structure. They should be used to think, for example, about the effects of higher required capital ratios for banks, or the effects of public debt management, or the effects of particular forms of unconventional monetary policy. The core frame should be one that is widely accepted as a starting point and that can accommodate additional distortions. In short, it should facilitate the debate among macro theorists.
Policy models, aimed at analyzing actual macroeconomic policy issues. Models in this class should fit the main characteristics of the data, including dynamics, and allow for policy analysis and counterfactuals. They should be used to think, for example, about the quantitative effects of a slowdown in China on the United States, or the effects of a US fiscal expansion on emerging markets.
In response, Simon Wren-Lewis rejoiced,
Ever since I started blogging I have written posts … to try and convince fellow macroeconomists that Structural Econometric Models (SEMs), with their ad hoc blend of theory and data fitting, were not some old fashioned dinosaur, but a perfectly viable way to do macroeconomics and macroeconomic policy.
Pointers from Mark Thoma.
For why Blanchard and Wren-Lewis are wrong, see my essay Macroeconometrics: the Science of Hubris. If the profession follows their advice, macroeconomics will be regressing in every sense of the word.
These guys run academia. I’m not holding my breath.
The thing is that everyone who decides on policy has a model on which he or she relies, implicitly or explicitly. Donald Trump, Larry Kudrow, Steve Moore and the House GOP “Blueprinters,” all have models of how the economy works in mind. So did President “O” and his advisors. The advantage of economists’ theoretical and empirical models is that they are explicit, so could be refuted or contested. What can one do with the Trump-Kudlow-Moore (TKM) model?
What we ARE going to do is: a) criticize things we don’t know about! (Steve Martin), and b) see what the results are and criticize the results, or in some cases admit they are better than expected.
If Trump successfully uses gov’t influence to make more big companies create more American jobs, and it ALREADY looks like he’s being more successful than Obama or Bush and maybe even than Bill Clinton, than his pragmatic actions will be more voter attractive than any of the Nobel Prize winning Economists whose advice failed to be as good at creating US jobs.
“Do whatever works”, “Do whatever it takes”, (the end justifies the means): for lower & middle class workers, more jobs is far more important than “better theory”.
As long as your model is “mental”, you can say anything you want about it. Publish the explicit code in a widely-known computer language like Fortran or C. Then tell me about your results! All your assumptions, starting data etc. will be explicit and available for critique.
Would someone please model the Great Depression for me! I think the resulting discussion would expose the gulf between Economics and the Economy.
Regards,
Bill Drissel
Frisco, TX