We investigate the applicability of Rodrik’s accounts of model selection and horizontal progress to macroeconomic DSGE modelling in both academic and policy-oriented modelling contexts. We argue th...

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Model selection in macroeconomics: DSGE and ad hocness

What is the relevance of macroeconomics today? The crisis that has been raging since 2007 has spread to economic theories, and it might seem that it is no longer possible to do macroeconomics as before. But what version of macroeconomics was at fault here? Macroeconomic questions have not really changed: they examine growth and fluctuations of the broad national aggregates (national income, employment, inflation, investment, consumer spending or international trade). How are these fundamental aggregates determined, and how differently should we think about them? The economic world is too complex to be thought about ‘raw’, so the use of a model to answer these questions helps make deductions and justify conclusions. It is easier, then, to perceive what beliefs they have been based on, and to challenge them. Economic concepts are not built to be put on a computer and run.1 It is thus all the more important to point out fragility or recklessness wherever it appears. If intuition does not suffice to reject the hypothesis and reasoning, then experimentation must confirm our instincts: does it pass the smell test? Economists do not directly perceive the concreteness of their w orld, but engage in diverse manoeuvres that seek to prepare that world for investigation. Using various abstractions and omissions, they build models to describe simple imaginary stage sets. Models are constructed rather than discovered; they are socially built because scientific work is an intrinsically social activity. If economic models of human interactions are socially constructed by economists, the social world is not constructed by the modelling practices of economists. It is from this standpoint that the authors of this volume offer to take stock of their discipline, with all its variety, from ancient to modern macro, or vice versa. Since the late 1970s, a majority of macroeconomists have focused on developing what they call the ‘modern macroeconomics of business cycle fluctuations’. Until the world entered a crisis initiated by subprime mortgage defaults, excessive leveraging followed by deleveraging, output and employment meltdowns and destruction of perceived wealth, there was a common belief that macroeconomic truth had been discovered. A

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Jean Philippe Touffut

Papers

Introduction: passing the smell test