On the future of macroeconomic models

• Published in: Oxford review of economic policy Vol. 34; no. 1/2; pp. 43 - 54
• Main Author: Blanchard, Olivier
• Format: Journal Article
• Language: English
• Published: UK Oxford University Press 05-01-2018
• Subjects: macroeconomics; dynamic stochastic general equilibrium; macroeconomic policy making; forecasting; graduate teaching; macroeconomic model; DSGE; methodology
• ISSN: 0266-903X; 1460-2121
• DOI: 10.1093/oxrep/grx045

Macroeconomics has been under scrutiny as a field since the financial crisis, which brought an abrupt end to the optimism of the Great Moderation. There is widespread acknowledgement that the prevailing dynamic stochastic general equilibrium (DSGE) models performed poorly, but little agreement on what alternative future paradigm should be pursued. This article is the elaboration of four blog posts that together present a clear message: current DSGE models are flawed, but they contain the right foundations and must be improved rather than discarded. Further, we need different types of macroeconomic models for different purposes. Specifically, there should be five kinds of general equilibrium models: a common core, plus foundational theory, policy, toy, and forecasting models. The different classes of models have a lot to learn from each other, but the goal of full integration has proven counterproductive. No model can be all things to all people.