Primer: Teaching Models Versus Empirical Models — Brian Romanchuk

I divide macroeconomic models into two classes: teaching models, and empirical models. Teaching models are far more common, and most economic arguing about these models. An alternative name for them is "toy models," which points to the weakness of this class. They are not fit to real-world data, and so there is no reason to expect them to offer useful predictions. More dangerously, the class of teaching models is so wide that almost all scenarios can be seen as the result of such a model (barring things like violating accounting identities). This explains why we can find neoclassical economists arguing the opposite sides of political issues, despite being in the same theoretical school of thought. Empirical models offer predictive content, and to what extent they are accurate, can possibly offer concrete measures of trade-offs between policy choices. The problem is that fitting these models to data is difficult. Certain teaching models can be fit to data -- and thus fall into this class -- but one needs to be very careful about what model we are talking about.

(Note: this article is a digression explaining my distinction between empirical and teaching models. This matters a lot for the discussion of DSGE macro models.. With this topic out of the way, I will then take up with some deeper analysis.)

Bond Economics
Primer: Teaching Models Versus Empirical Models
Brian Romanchuk