“Is Modern Macro Useful for Development Economics?” by Mark Thoma (8/2010)
“The current generation of standard DSGE models”are not only ill-suited for prime-time policymaking in the developed world, they are also inadequate for the developing-country context”:
Is Modern Macro Useful for Development Economics (and Economists)?, by Jamus Lim: One of the interesting byproducts of the global financial crisis has been the induced crisis in the economics profession. More precisely, there has been a minor intellectual crisis in macroeconomic thought…
There is little need to rehash many of the arguments here… However, Narayana Kocherlakota has a recent piece on the contribution of modern macro to economy policy, and perhaps it would be useful to add to his thoughts from the perspective of development economics and developing country policymaking. …
Kocherlakota highlights three big problems that he sees with the ability of modern macro models to serve policy: (a) a piecemeal approach toward the inclusion of frictions, rather than a coherent strategy toward incorporating them; (b) a general neglect of financial markets;… and (c) a reliance on ad hoc exogenous shocks to create movements in the endogenous variables of the model…”
