Discussion with Olivier Blanchard on Macroeconomic Models
In recent post by Blanchard, entitled ‘The Need for Different Classes of Macroeconomic Models’, he underlined the need for different classes of macro models for different tasks. Two classes of models are considered. First, theoretical models that are micro founded and are intended to clarify theoretical issues within a general equilibrium setting, like DSGE models. Second, policy models that might not be micro founded and aimed at analyzing specific issues related to the macroeconomic policy. Blanchard describes the finding of one model that can respond to both uses as a pipe dream.
In a correspondence discussion with Blanchard, I expressed my surprise vis-à-vis the proposition of separation between theoretical and policy models. The aim of science is the unification, I think, rather than separation. If we look at physics, the efforts of all scientists are oriented to understand and consequently to provide theories to what they observe. In line with this observation, I believe that macroeconomics, like physics or any other science, should have the objective of unifying what we observe and what we theorize. In favor of this claim, one can notice that macroeconomics is very young science. At the end, there is still a long way to go to achieve this.
In response to my claim, Blanchard thinks that the goal of unifying both classes of models is unattainable, surely today, and probably forever, given the complexity of seven billion people interacting in complex ways. The main point is that trying to do both classes in one model today is counterproductive.
To conclude, I think that the complexity of interactions between economic agents is surmountable if we internalize those interactions and behaviors in our models, we can arrive at the stage where there are no conflicts between theory and practice. Especially, the research agenda on the New Keynesian economics studied within a behavioral framework is oriented to this aim.