Introduction: moving forward

Abstract

The financial crisis that began in 2007 has generally shown the weaknesses of neoclassical theories and policies, in particular by highlighting the irrelevance of modern macro models such as the Dynamic Stochastic General Equilibrium (DSGE) model and its microfoundations, which has come under considerable attack in the last few years, even from the mainstream. Indeed, as Lavoie (2018, p. 15) observes, “there is considerable dissatisfaction with the current state of mainstream macroeconomics”, leading The Economist (2009) to refer to the “turmoil among macroeconomists”. As early as 2009, Krugman (2009a, Internet) was claiming “[t]he economics profession mistook beauty, clad in impressive-looking mathematics, for truth”. More recently, he once again criticised the quest for microfoundations (see 2013, Internet), arguing “so the truth was that microfoundations in macroeconomics had its moment, but failed utterly at the one thing it was sold, above all, as being able to do – namely, give a better explanation of why nominal shocks have real effects. Time, you might think, to reconsider the project”. A few years earlier, Solow, in a 2010 address to the United States Congress, disapprovingly claimed “I do not think that the currently popular DSGE models pass the smell test” (see Solow, 2010). More recently, the Oxford Review of Economic Policy has dedicated two entire issues to the mainstream criticism, although a careful reading of the various contributions reveals the schism is not as deep (see Rochon and Rossi, 2018). Indeed, most articles are of the opinion that the problem with the DSGE model and its failure to predict the crisis or to suggest any meaningful policies since, is because of the lack of the right kind of microfoundations, or what King (2012, p. 150) describes as a debate over “our [microfoundations] are better than yours”. There is no general call for the abandonment or replacement of DSGE models. Far from it. Rather, many are proposing amending the model and nothing more. Indeed, there are calls for the introduction of financial frictions, and other such imperfections, all in the aim of moving away from the RARE (rational expectations, representative agent) DSGE model (see King, 2012). Yet, attempts