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Does Macroeconomics Need Microeconomic Foundations?
Abstract
I argue that it is microeconomics that needs foundations, not macroeconomics. Preferences need to be built on biology, and, in particular, on neuroscience. In contrast, macroeconomics could benefit from rationalizations of aggregate economic phenomena by non-equilibrium statistical physics.
... dominant in policy making until 1970s. The central challenge to the Klein/Tinbergen type macroeconometric models was the famous "Lucas Critique" (Hoover, 2015;Da Silva, 2009). ...
... The implied solution was to start building macroeconomics on first microeconomic principles taking the intentional, rationally behaving individuals/agents as the analytical unit (Da Silva, 2009;Hoover, 2001 and2013;Palsson Syll, 2014). As Hoover (2015) puts it, "[t]he Lucas critique called for a radical reductionisma bottom-up approach in which the behavior of aggregate quantities was derived deductively from the characterization of individuals". ...
... They also observed that VAR and non-VAR macro models without explicit expectations were often stable empirically. Based on Estrella and Fuhrer (2003), Da Silva (2009) argues that it is not assured that the Lucas critique can be preemptively removed even if macro models are explicitly based on micro foundations. In a way, this is not a surprise as Lucas himself admits elsewhere that "the question of whether a particular model is structural is an empirical, not a theoretical one. ...
... This Keynesian macroeconomietrc approach was dominant in policy making until 1970s. The central challenge to the Klein/Tinbergen type macroeconometric models was the famous "Lucas Critique" (Hoover, 2015;Da Silva, 2009). ...
... The implied solution was to start building macroeconomics on first microeconomic principles taking the intentional, rationally behaving individuals/agents as the analytical unit (Da Silva, 2009;Hoover, 2001 andPalsson Syll, 2014). As Hoover (2015) puts it, "[t]he Lucas critique called for a radical reductionisma bottom-up approach in which the behavior of aggregate quantities was derived deductively from the characterization of individuals". ...
... The idea that "first microeconomic principles are policy-invariant" can also be questioned (Da Silva, 2009;Palsson Syll, 2014). It is not possible to specify first principles such as preferences that depend on expectations and simultaneously time-invariant to policy changes that are being predicted (Da Silva, 2009). ...
The principal goal of the Economic Adjustment Programmes applied in Greece since
2010 was the elimination of the economy’s so-called ‘dual deficit problem’ by a mix of
austerity and internal devaluation. This policy prescription was originally expected to
put the country’s public debt back on a sustainable track and boost the
competitiveness of the Greek productive sector, thereby promoting export-led growth.
Whereas the implemented policy agenda resulted in a sharp reduction in fiscal deficit
and unit labour costs, Greece still faces a high creditworthiness risk, lacklustre export
growth and an uncertain macroeconomic outlook. The root cause of the failure could
arguably be found in the detrimental impact of austerity on private sector performance
and the ensuing repercussions in the aggregate economy. The paper aims to propose
an alternative framework of explaining and assessing the cost of creditors’ policy,
pointing out the way it has undermined the quality of the private sector’s balance
sheet and disturbed intersectoral linkages within the economy, eventually engulfing
the entire economy in a debt-deflation trap.
... Macroeconomic growth is generally discussed to have microeconomic foundations (Janssen, 2006;Hoover, 2008;Da Silva, 2009). Microeconomic models are concerned with the development of micro actors, such as consumers, NGOs or firms. ...
A sample of Greek SMEs selected from four regions having different levels of centrality/peripherality and five major industries of the Greek economy in the 1995 – 2002 period, representative of all levels of centrality/peripherality at the Greek economy, is used to test hundreds of cross-sectional models testing the association of SME logarithmic employment and turnover growth with proxies used for capital, labour, land, industrial infrastructure, policy support, firm size, manufacturing and distance from Athens. The significance of the last three factors revealed in the association of SME logarithmic employment growth, brings in mind the emphasis on microeconomic assumptions given in Krugman's 1991 core-periphery model and agrees with a discussion on core-periphery imbalances in Greece.
Few points that emphasize even further the significance of this text are a) the extended efforts to build hundreds of models before producing the final one, b) that such models have been tested for the whole economy, and, as such, resemble to general equilibrium models employed by Krugman (1991) that refer to the whole economy and have microeconomic foundations, and c) that the whole sample of SMEs could be grouped in two core-regions (Attiki and Kentriki Makedonia) and two peripheral (Thessaly and Ipeiros), and in that respect it resembles even further to Krugman's work. Furthermore, the sample tests significant manufacturing regions of Greece and could be divided to a manufacturing and a non-manufacturing sample, again resembling to Krugman’s original hypotheses tested, since the agricultural region tested by Krugman is supposed to be used as an explicit differentiation from a manufacturing region, acting as the peripheral region. Beside both Thessaly and Ipeiros are agricultural regions.
This text is available on-line by the journal. I am not that proud for the writing of my work because I had not revealed all points in the analysis and conclusions but both the structure of the analysis, and conclusions are worth considering and highlighting I believe. Further light should be shed on the matter. Recently I saw its use by Belluci et al. (2021) Venture Capitals in Europe, JCR Technical Report, EU Commission.
Analysis of the development of macroeconomic indicators is commonly done as an evaluation material and economic management strategy in the future. There are 3 macroeconomic indicators that are commonly used at the regional level, namely the rate of inflation, economic growth and employment. This study aims to conduct an analysis of the three indicators at the Bandung City level. The research method used is descriptive and quantitative analysis. Descriptive analysis is based on the movement of data presented through graphs and tables. While quantitative analysis is more focused on calculating the inflation variable projections and correlation analysis between macroeconomic variables. Based on the results of descriptive analysis, it is known that the Bandung City inflation indicator was relatively maintained in the second quarter of 2019. Even though there is a moment of Eid, the inflation rate is still under control, and even tends to decrease in June 2019. However, the inflation rate is predicted to increase in the third quarter of 2019. Food commodity inflation is predicted to occur due to the peak of the dry season in August-September. On the indicator of the rate of economic growth, the most recent data for 2017 shows a decline in the growth rate, by 7.21%. The achievement of economic growth is also the lowest since 2011. On the employment indicator, there is an irrelevant relationship between the Economic Growth Rate (LPE) Labor Force Participation Rate (TPAK), and the Open Growth Rate
Resumo: Estudamos a neutralidade monetária em uma economia na qual cada firma pode pagar um custo para atualizar seu conjunto informacional e fixar seu preço ótimo (estratégia Nash) ou usar, sem custo, apenas informações passadas e fixar um preço subótimo (estratégia de racionalidade limitada), com que incorrerá, então, em uma perda aleatória. Elaboramos uma microdinâmica evolucionária com taxa de mutação endógena que, ao interagir com a dinâmica macroeconômica, determina a variação das proporções com que essas estratégias estão distribuídas entre as firmas. Essa distribuição, por sua vez, co-evolui com as variáveis macroeconômicas (produto e nível de preços) de cuja determinação ela participa. Por métodos analíticos, demonstramos que a extinção da estratégia de racionalidade limitada não é uma condição necessária para a neutralidade monetária. E, através de simulações, mostramos que o modelo replica a evidência empírica bastante robusta de um padrão de resposta hump-shaped do produto a um choque monetário. Palavras-chave: racionalidade limitada; neutralidade da moeda; dinâmica evolucionária. Abstract: We study money neutrality in an economy in which firms can either pay a cost to update their knowledge on relative prices and set the optimal price (Nash strategy) or make use, without a cost, of past knowledge and try to set a price which is as close as possible to the optimal one (boundedly rational strategy), incurring then in a random loss. We develop an evolutionary microdynamics with endogenous mutation rate that, by interacting with the macroeconomic dynamics, determines the state transition of the distribution of pricing strategies across the population of firms. This distribution, in turn, co-evolves with the macroeconomic variables (output and price level) in whose determination it participates. Using analytical methods, we demonstrate that the extinction of the boundedly rational pricing strategy is not a necessary condition for money neutrality. And, through simulation, we show that the model replicates the robust empirical evidence of a hump-shaped response of output to a monetary shock.
This article discusses some issues and challenges facing modern macroeconomics. We argue for the necessity to replace the
reductionist approach at the heart of mainstream DSGE models with an approach rooted on the science of complexity and agent-based
modelling. To strengthen and exemplify our position, we show a simple example and introduce several items for a research agenda
along these lines.
The microfoundations literature has attempted to bridge the gap between microeconomic and macroeconomic models. Many models in this literature have used the theoretical construct of a representative agent. Economy-wide outcomes are thereby presented as if they were the result of the optimizing behaviour of one individual. Emergent properties at the macro level are by construction precluded from the analysis. Other literatures exist where emergent properties are taken to be at the heart of the quest for microfoundations.
Empirical estimates of monetary policy rules suggest that the behavior of U.S. monetary policymakers changed during the past few decades. However, for that same time period, statistical analyses of lagged representations of the economy, such as VARs, often have not rejected the null of structural stability. These two sets of empirical results appear to contradict the Lucas critique. This paper reconciles these results with the Lucas critique by showing that the apparent policy invariance of reduced forms is consistent with the magnitude of historical policy shifts and the relative insensitivity of the reduced forms of plausible forward-looking macroeconomic specifications to policy shifts.