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Where Modern Macroeconomics Went Wrong

Stiglitz, Joseph E.

This paper provides a critique of the DSGE models that have come to dominate macroeconomics during the past quarter-century. It argues that at the heart of the failure were the wrong microfoundations, which failed to incorporate key aspects of economic behavior, e.g. incorporating insights from information economics and behavioral economics. Inadequate modelling of the financial sector meant they were ill-suited for predicting or responding to a financial crisis; and a reliance on representative agent models meant they were ill-suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality. The paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them.

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Also Published In

Title
Oxford Review of Economic Policy
DOI
https://doi.org/10.1093/oxrep/grx057

More About This Work

Academic Units
Economics
Published Here
February 5, 2019

Notes

Also published as NBER Working Paper No. 23795, September 2017, revised November 2017.)

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