Mark Thoma — Macroeconomics: The Roads Not Yet Taken

How can we fix modern models? There are many avenues that need to be explored, from the need for micro foundations to how expectations are modeled. One of the biggest problems is the failure of these models to connect the real and financial sectors in a way that gives insight into why financial panics occur, how financial meltdowns impact the rest of the economy, and how policymakers can limit the subsequent damage.

To gain insight into these important questions, modern models must overcome their reliance on the representative agent approach. This modeling technique misses the strategic interaction among agents within the financial sector, something I believe is important to fully understand financial panics. Let me explain.…

However, the search for better macroeconomic models eventually turns out, we need to get beyond the tribalism and in fighting that limits inquiry and impedes the search for the truth. What macroeconomics needs most of all right now are open minds and a willingness to consider new approaches to macroeconomic problems.

The Fiscal Times
Macroeconomics: The Roads Not Yet Taken
Mark Thoma | Professor of Economics, University of Oregon