The Macro Wars … Or Not

There’s been no shortage of pontificating about the state of macro (and Mark Thoma has put together a useful reading list, here). But there are two important things to note about the debate. First, it has been dominated by folks in their 50’s and beyond. And second, these rhetorical broadsides haven’t involved any actual research into the state of macro.

This is why I thought it worth highlighting Narayana Kocherlakota‘s contribution, which begins with facts and draws some useful conclusions. He starts by delineating a list of the folks who might collectively comprise the cutting edge of mainstream macro — those macroeconomists in top-15 economics departments (no business schools), tenured since 1990. Here’s his list:

  • MIT: Acemoglu, Angeletos, Werning
  • Harvard: Laibson
  • Chicago: Alvarez, Mulligan, Shimer, Uhlig
  • Princeton: Rossi-Hansberg
  • Stanford: Bloom, Klenow, Piazzesi, Schneider
  • Berkeley: Gourinchas
  • Yale: Engel, Golosov, Moscarini, Smith, Tsyvinski
  • Northwestern: Doepke
  • Penn: Fernandez-Villaverde, Krueger, Schorfheide
  • Columbia: Ng, Reis, Sala-i-Martin, Schmitt-Grohe, Uribe
  • Minnesota: Perri, Phelan, Rios-Rull
  • NYU: Lagos, Leahy, Ludvigson, Violante
  • Michigan: House, Killian, Stolyarov, Tesar
  • UCLA: Burstein, Hellwig, Ohanian
  • Wisconsin: Seshadri, Williams
  • UCSD: None
  • CalTech: None

Surveying the work of these folks leads Narayana to a cautiously optimistic set of conclusions about the state of the (mainstream) cutting edge, noting that:

  1. Macroeconomists don’t ignore heterogeneity.
  2. Macroeconomists don’t ignore frictions.
  3. Macroeconomic modeling doesn’t ignore bounded rationality.
  4. Macroeconomic models do incorporate a role for government interventions.
  5. Macroeconomists use both calibration and econometrics.
  6. There is no freshwater/saltwater divide — now.
  7. These researchers have been much more interested in the consequences of shocks than in their sources.
  8. The modeling of financial markets and banks in macroeconomic models is stark.
  9. Macroeconomics is mostly math and little talk.
  10. The macro-principles textbooks don’t represent our field well.

This is an interesting perspective. Like Narayana, I know and like most of these folks. And his summary of the facts seems right. These economists are too young to be responsible for the state of modern macro, and this generation is notably absent from the current macro wars. (The headline-grabbing names, such as Krugman, Cochrane, Stiglitz, DeLong, Prescott, or Lucas, are all of an earlier vintage.) If Narayana is right, then perhaps the future is brighter than the recent past. I hope so.

But there’s one more theme missing from this summary. This is a list of economists much more interested in economic theorizing than economic policy. It’s hard to find the intellectual successors to folks like Marty Feldstein or Larry Summers — economists who consider policy advice an important role of academic economists. Notably, none of these folks have ever served on the Council of Economic Advisers. As far as I’m aware, none were advisers to either the Obama or McCain campaigns. There are a few who consult to the Fed. I’m not aware of any significant engagement of these folks with the IMF or World Bank. Perhaps, with time, this generation (my generation!) will become directly involved in the policy debate. But until this happens, Narayana’s optimism about the state of academic macro won’t translate into equal optimism about the state of macro policy debates.


Unfortunately i dont think we even have policy debates anymore. At least not in public. We have political arguments that, enabled by lazy coverage, quickly devolve into shouting matches.

I appreaciate you work in trying to focus on substance, though. an interesting corrollary is that while blogs were initally considered a sort of anything-goes, wild west of journalism, they now do a better job of covering substance than their front page brethren.

Joe Smith

"Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move."

There is a confession that academic macro economics is essentially irrelevant to policy making.

They need to stop searching under the street light and consider not the sources of exogenous shocks but what it is about the linkages in the economy that make it vulnerable to external shocks.

science minded

Dear Joe Smith, I am having difficulty with the first why? Do you mean in the general sense of an explanation of business cycles or specifically. Forget about an ultimate explanation. Since you are referring to the macro side, I wonder if there is a connection between the macro side of economics and the macro side of sociology as Emile Durkheim understood it. As far as society is concerned, Durkheim found two general principles operating--restraint and integration. This is a question that I do not know the answer to. But one bank that recieved money has been holding its own and steady (without huge ups or downs over the last month or so), I wonder if the bit of restraint i.e., regulation is working more generally as far as others are concerned. These are not mere thoughts, for I have tested Durkheim's theory using data from college sports and there were implications of the results generally relevant to policy making


Joe Smith

Dear Science minded. You said "Dear Joe Smith, I am having difficulty with the first why?"

The "why" appears inside of a passage from the piece by Narayana that is linked to and which is really what I was reacting / responding to.

I see I have a typing error which has probably contributed to the confusion. My first paragraph starts with "there" when it should have said "this".

Personally, I view the short term instability in markets to be primarily a result of the following mechanism:

Actors in the economy who know or suspect that they do not have complete information will look to the recent past as their guide to the future and will tend to copy strategies that they see have worked, in the recent past, for others rather than attempt to do a fundamental analysis (since a rational person who knows or suspects his information is incomplete will know that fundamental analysis may be worthless). The result is that a material number of market participants are "momentum" players with the result that small random fluctuations can feed large movements as momentum players pile on.

IMHO, it is also worth remembering that in a risk averse world, if investors' estimate of volatility / risk increases the market may go down significantly even if there was no initial change in the "expected" value of the assets.


Sundar Srinivasan

I think Emmanuel Saez of Berkeley and Andrei Shleifer of Harvard deserve places in Narayana's list. But I don't think they played any role in policy making. Krugman and Summers have been in the President's Council of Economic Advisers in their early ages.


Seems quite lacking on the inherent instability of the macroeconomy and rather useless if their models can't model this other than through an exogenous shock. Focusing on consequences rather than causes may be irrelevant under different causes or more pertinent models.

science minded

One more thing- that bit of knowledge has a relatively rational side to it-- the understanding of which has some bearing on the practice of the science of economics. But that subject is one for the book.

science minded

There seems to be some confusion going on here between micro and macro economics. If one is in the macro realm then can one even think in terms of time sequences or consequences or real causes (i.e., motivations as distinct from possible interconnections between variables? In sociology, a study of the macro realm of society has yielded propositions that are timeless. Need I say more?

science minded

I should have said and to be really precise- "relatively timeless."

ray bans on my face

Macroeconomics was personally one of my favorite subjects while I was working on my Bachelor's.

Macroeconomics is just another tool that is helpful in attempting to predict economic phenomena. The study has come a long way, and it still has much farther to go. But it really is a subject that should be embraced and researched by more economists in order to evolve it into a more efficient and useful tool to be used in analyzing economic phenomena and predicting the outcomes of new (and sometimes ridiculous) policies. I am glad to see that Narayana Kocherlakota produced such a piece of literature.

For some food for thought, allow me to paraphrase economist Charles Wheelan: "a friend of mine said 'if we know so much about public policy, then how come there are so many problems?'......That's like saying if we know so much about medical science, then how come people keep dying?" To relay my point, with the micro foundations in macro theory and the econometric work that goes into developing macro theory, there is certainly no reason to dismiss it.

To science minded: The answer to your question (09/21/09--3:41 pm) is yes. Try setting up a Mundell-Fleming model to predict the effects of the fed lowering interest rates to battle deflation and increase the U.S.' net exports, in any time period.

Trying to draw parallels between economics and sociology is an interesting approach, seeing as they are both social sciences and seek to explain phenomena within society, but I think comparing the two misses the point.



Engel from Yale has been involved in policy (and politics) in his native Chile.


I'm not surprised to hear that there are younger stars in the macroeconomic sky.

But isn't the key question what these younger stars were able to say about the financial crisis both before it occurred and after?

Maybe they all just agree with "Krugman, Cochrane, Stiglitz, DeLong, Prescott, or Lucas" and "Marty Feldstein or Larry Summers."

In which case it's still a useless discipline.

ray bans on my face

Saying macro is useless implies the same kind of school boy bias employed by a group of 5'11" white boys colluding to keep the 6'5" single black kid off the basketball team because they're scared the black kid will steal their girlfriends.

Those that are quick to dismiss macro seem to forget that macroeconomists also learn the same economics education that every other micro school economist touts. It doesn't really matter if any economist from either discipline predicted the recession or the financial "crisis," because no one outside of the study would have listened anyway. A lot of people thought things were so good before the crash that if any economist advocated thrift to help hedge the economy from the ensuing crash, he/she would have been dealt a deaf ear. That's called irrational exuberance. The financial "crisis" was a problem of moral hazard, irrational exuberance and overbuilding, not whether or not some young macro or micro economist was able to call it. There was so much asymmetric information in the financial market it was (still is) ridiculous. As economists, its not necessarily our job to protect people from themselves. Let it happen. People need to learn.

One might as well claim that the whole study of economics is useless, like some kind uneducated fool who only gets his information from Ron Paul supporters, fox news and cnn, and truly believes the study of economics is the reason why the economy hit a telephone pole (and I've met several of these types, especially at the bars).

Don't think of either study as useless, but as something reserved for the esoteric. AND also realize that neither study predicts everything.



cool blog

Harriet R, UK

I might be a bit behind the times in finding this blog post, but I'm rather disappointed that all top 15 departments are in the US - is it really true that the rest of the world is so bad at Macro?