Benchmarking macroeconomic theory against reality

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it. Anyway, this is what I wrote today which was highly constrained by meetings and travel for much of the day.

Read it at Bill Mitchell — billy blog
Benchmarking macroeconomic theory against reality
by Bill Mitchell

Any macroeconomic theory should help us understand the real world and provide explanations of historical events and reasonable forward-looking outlooks as to what might happen as a consequence of known events – for example, changes in policy settings. A theory doesn’t stand or fall on its absolute predictive accuracy because it is recognised that forecasting errors are a typical outcome of trying to make predictions about the unknown future.

However, systematic forecast errors (that is, continually failing to predict the direction of the economy) and catastrophic oversights (for example, the failure to predict the 2008 Global Financial Crisis) are an indication that a macroeconomic theory is seriously deficient.