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Where Modern Macroeconomics Went Wrong

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  • Joseph E. Stiglitz
Abstract
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.

Suggested Citation

  • Joseph E. Stiglitz, 2017. "Where Modern Macroeconomics Went Wrong," NBER Working Papers 23795, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23795
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    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
    • E0 - Macroeconomics and Monetary Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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