Macroeconomic Thinking Outside the Box

Back in the old days, macroeconomics meant taking a DSGE framework, with a representative household and representative firm and rational expectations, and adding in a friction of some sort to find the unique equilibrium. That is not at all the case for what I'd consider to be "mainstream" macroeconomic research today.

In my opinion, the "add a new friction" strategy hasn't been all that helpful for understanding how the macroeconomy reacts to shocks. Here is some reading on alternative approaches of a larger nature that have a chance at being fruitful. I have outlined briefly my views on the goals of short-run macroeconomics here.

One of the things that quickly becomes clear is that these explanations for macro fluctuations are considerably messier than you get with a traditional DSGE model. One of the reasons the DSGE approach became popular was because a talented grad student could add a new friction to an otherwise standard model, show that it improves things along some dimension, and send it off to be published. It's not as clear (at least to me) how you can push all of these ideas into that framework.

There is a lot of work that remains to be done. A connection needs to be made to the data - we need to determine which of the explanations contributes meaningfully to the business cycle and which are unimportant.


Roger Farmer, "The Indeterminacy Agenda in Macroeconomics" lays out nicely the current state of the literature (as of early 2019) on multiple equilibria. link

Roger Farmer, "The Evolution of Endogenous Business Cycles" distinguishes between multiple equilibria and multiple steady states. link

Animal Spirits

Roger Farmer, "Animal Spirits" link

Finite Horizons

Michael Woodford, "Monetary Policy Analysis When Planning Horizons Are Finite" link

Rational Inattention

Chris Sims, "Rational Inattention and Monetary Economics" link

Monetary Authority Beliefs

Thomas Sargent, Noah Williams, and Tao Zha, "Shocks and Government Beliefs: The Rise and Fall of American Inflation" link


George Evans and Seppo Honkapohja, "Learning and Macroeconomics" link

Traditional Models

For a flavor of mainstream macro of a decade earlier, see Olivier Blanchard's "The State of Macro" link

Another paper that shows the state of traditional DSGE models is Jordi Gali and Mark Gertler's "Macroeconomic Modeling for Monetary Policy Evaluation" link

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