The Macroeconomic Controversy Over Price Rigidity — How to Resolve it and How Bayesian Estimation has Led us Astray

Price rigidity plays a central role in macroeconomic models but remains controversial. Those espousing it look to Bayesian estimated models in support, while those assuming price flexibility largely impose it on their models. So controversy continues unresolved by testing on the data. In a Monte Carlo experiment we ask how different estimation methods could help to resolve this controversy. We find Bayesian estimation creates a large potential estimation bias compared with standard estimation techniques. Indirect estimation where the bias is found to be low appears to do best, and offers the best way forward for settling the price rigidity controversy.

The Frontier of Macroeconomic Modelling: Proceedings of the JRC-IEA Workshop 2017

This chapter discusses the Proceedings of the JRC-IEA Roundtable, which objective was to promote a technical debate on the recent developments of DSGE and alternative modelling strategies, the main mechanisms at play and their effectiveness in assessing the impact of R&D and innovation policies. Leading academics presented state-of-the-art macroeconomic models in the area of economic growth and innovation. It follows a debate between academics and practitioners trying to figure out the key elements of a macro model designed to evaluate innovation policies should include.

Development of macroeconomic models based on behavioral economics: issues and further research

The article analyzes the formation, spread and development of behavioral economics in microeconomic research, as well as its development in macroeconomic research over the past two decades. The key shortcomings of neoclassical macroeconomic models and their critique based on existing research and practical application by central bankers are highlighted. The key stages in the formation of behavioral macroeconomics, elements of which began to appear in the works of neoclassical macroeconomists, have been identified. The main arguments in favor of replacing neoclassical macroeconomic models with new behavioral macroeconomic models are presented, as well as key issues of behavioral macroeconomics and prospects for its further adoption as a basic concept for decision-making for governments. Key studies of behavioral economists on behavioral macroeconomic models, most of which are agents-based (microfoundations-based), have been identified and systematized. Based on the results of testing various behavioral models by world-renowned scientists, as well as our analysis, it is proposed to focus further macroeconomic research on behavioral models based on the activities of agents (microfoundations).

OF ALCOHOL, APES, AND TAXES: GÜNTER SCHMÖLDERS AND THE REINVENTION OF ECONOMICS IN BEHAVIORAL TERMS

The article examines an early and idiosyncratic version of behavioral economics or “empirical socio-economics,” which the German economist and taxation expert Günter Schmölders developed in the postwar decades. Relying on both his published papers and his lecture notes and correspondence, it scrutinizes Schmölders’s intellectual upbringing in the tradition of the Historical School of Economics (Historische Schule der Nationalökonomie) and his relation to the emerging ordoliberalism, demonstrating that the roads that led to dissatisfaction with the emerging neoclassical mainstream and the unrealistic behavioral assumptions of macroeconomic models were manifold. Accordingly, it shows that behavioral economics is compatible with various intellectual and political backgrounds and convictions. Yet, it still forms a distinct entity: comparing Schmölders with contemporary and later behavioral economists, I will show that they shared essential methodological assumptions as well as an understanding of human beings as decision-making organisms.

Why macroeconomics needs experimental evidence

This paper discusses how macroeconomics can and already has begun to make use of controlled experimental methods to address the assumptions and predictions of macroeconomic models as well as to evaluate the impacts of macroeconomic policy interventions. Specific issues addressed include rational expectations and alternatives, intertemporal optimization with an application to household consumption and savings decisions and the efficacy of various monetary policies.

Capability accumulation and product innovation: an agent-based perspective

This paper studiesthe relevance of productheterogeneity and relatedness for the accumulation ofcapabilities in firms, as well as their implications for innovation dynamics. The existing literature has produced extensive evidence on the relevance of capability accumulation for innovation processes. Yet, an assessment of prior attempts to model these processes indicates that when it comes to the final consumption good sector, the evolutionary macroeconomic literature has focused on process rather than product innovation. To facilitate the consideration of empirical and microeconomic insights on product innovation in these models, this paper introduces a simple agent-based model, which may later serve as an innovation module in macroeconomic models. In the model, firms accumulate capabilities to produce final consumption goods that are heterogeneous in terms of their complexity and differ in their relatedness to each other. The model is used to study theoretical implications of different topological structures underlying product relatedness by conducting simulations with different ‘product spaces’. The analysis suggests that the topological structure of the product space, the assumed relationship between product complexity and centrality, as well as the relevance of product complexity in price setting dynamics have significant but nontrivial implications and deserve further attention in evolutionary macroeconomics.

Book Reviews

Tiziana Assenza of Toulouse School of Economics, University of Toulouse Capitole reviews “Behavioural Macroeconomics: Theory and Policy” by Paul De Grauwe and Yuemei Ji. The Econlit abstract of this book begins: “Presents new theoretical macroeconomic models based on individuals' complexity, heterogeneity, and cognitive limitations, addressing the current implausible assumptions of mainstream macroeconomics about human behavior and the capacity of human beings to comprehend the world they live in.”