Whats Wrong with Economic Models? A Response to John Kay
https://doi.org/10.32609/0042-8736-2012-5-14-21
Abstract
The article is a response to a polemical essay of J. Kay and his critique of macroeconomic modeling. The author shows that models are an indispensable instrument of economic analysis and that the only alternative would be the formulation and estimation of structural relationships between macroeconomic aggregates. But such a project is doomed to failure, because it does not account for the expectations of economic agents. However, as the author admits, the critique of rational expectations concept is justified. He shows possible directions that a more realistic analysis of ecpectation could take.
Keywords
JEL: A11; A12; B40; C51; E00; E44; E66
References
1. Carroll C. D., Sommer M. Epidemiological Expectations and Consumption Dynamics// Working paper / Money Macro and Finance Research Group. 2003. April.
2. Christiano L. J., Eichenbaum M., Evans C. L. Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy // Journal of Political Economy. 2005. Vol. 113, No 1. P. 1-45.
3. Evans G. W., Honkapohja S. Learning and Expectations in Macroeconomics. Princeton: Princeton University Press, 2001.
4. Frydman R., Goldberg M. Imperfect Knowledge Economics: Exchange Rates and Risk. Princeton: Princeton University Press, 2007.
5. Guesnerie R. Assessing Rational Expectations 2: Eductive Stability in Economics. Cambridge, MA: MIT Press, 2005.
6. Guesnerie R. Macroeconomic and Monetary Policies from the 'Eductive' Viewpoint // Monetary Policy Under Uncertainty and Learning / K. Schmidt-Hebbel, C. Walsh (eds.). Santiago: CentralBank of Chile, 2007.
7. Guesnerie R., Woodford M. Endogenous Fluctuations // Advances in Economic Theory: Proceedings of the Sixth World Congress of the Econometric Society / J.-J. Laffont (ed.). Cambridge: Cambridge University Press, 1992.
8. Kurz M. (ed.). Endogenous Economic Fluctuations: Studies in the Theory of Rational Beliefs. Berlin etc.: Springer, 1997.
9. Kurz M. A New Keynesian Model with Diverse Beliefs // Working paper/ Stanford University. 2011 September.
10. Milani F. Expectation Shocks and Learning as Drivers of the Business Cycle // Economic Journal. 2011. Vol. 121, No 552. P. 379-401.
11. Reis R. Inattentive Consumers // Journal of Monetary Economics. 2006. Vol. 53, No 8. P. 1761-1800.
12. Sargent T. J. Bounded Rationality in Macroeconomics. Oxford: Oxford University Press, 1993.
13. Slobodyan S., Wouters R. Learning in an Estimated Medium- Scale DSGE Model // CERGE-EI Working Paper No 396 / Charles University. Prague, 2009.
14. Smets F., Wouters R. Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach // American Economic Review. 2007. Vol. 97, No 3. P. 586-606.
15. Woodford M. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton: Princeton University Press, 2003.
16. Woodford M. Robustly Optimal Monetary Policy with Near-Rational Expectations // American Economic Review. 2010. Vol. 100, No 1. P. 274-303.
17. Woodford M. What's Wrong With Economic Models? A Response to John Kay. http:// ineteconomics.org/blog/inet/michael-woodford-response-john-kay. 2011.
Review
For citations:
Woodford M. Whats Wrong with Economic Models? A Response to John Kay. Voprosy Ekonomiki. 2012;(5):14-21. https://doi.org/10.32609/0042-8736-2012-5-14-21
Email this article 
