Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome / Ricardo J. Caballero.

By:

Caballero, Ricardo J

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National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w16429.Publication details: Cambridge, Mass. National Bureau of Economic Research 2010.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: In this paper I argue that the current core of macroeconomics--by which I mainly mean the so-called dynamic stochastic general equilibrium approach--has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in "fine-tuning" mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in "broad-exploration" mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.

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Previous	nber w16426 Give Credit Where Credit Is Due: Tracing Value Added in Global Production Chains /	nber w16427 Countercyclical Currency Risk Premia /	nber w16428 Financial Sector Regulation and Reforms in Emerging Markets: An Overview /	nber w16429 Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome /	nber w1643 Estimating the Continuous Time Consumption Based Asset Pricing Model /	nber w16430 How Do Immigrants Spend Time?: The Process of Assimilation /	nber w16431 Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century After the 1984 Waxman-Hatch Legislation /	Next

October 2010.

In this paper I argue that the current core of macroeconomics--by which I mainly mean the so-called dynamic stochastic general equilibrium approach--has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in "fine-tuning" mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in "broad-exploration" mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.