Sunday, June 12, 2016

The State Of Macroeconomics

Macroeconomics suffers from a serious problem.  It provides a poor description of reality.  The major models of the economy are not useful in forecasting.  The financial industry tried to use them for forecasting interest rates but they were not helpful.  Central banks, including the Fed, use them but they have been forced to supplement these models with a variety of home made sets of data in order to make more accurate forecasts.  The basic problem with the models is that they make unrealistic assumptions about how individuals and firms really behave.  Garbage in and garbage out is the best description of what has dominated in academia in recent years.  The best descriptions of what happens at the macro level come from economists like Keynes, Hayec and Minsky who have long been ignored in academia.  Their descriptions of economic activity were based upon intuitions derived from experience in the real world.  Its likely that the the future of macroeconomics will include insights from psychology, sociology and studies about what really happens in firms.  It will also make greater use of data that will be used to test the validity of hypotheses.

This article offers some additional comments on the state of macroeconomics.  It is followed by lots of comments.

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